DSPBR AND AIG WORLD GOLD FUNDS - BEDAZZLING BEAUTIES

The equity market has finally seen a ray of hope and so have equity-linked mutual funds (MFs). After staying in negative territory for months on
Gold
end, the trailing one-month returns of most schemes have finally entered the positive zone.

While a majority of the equity schemes generated one-month trailing returns in the range of 1-6 % as on December 17, ’08, there are a few schemes whose returns are as high as 10-11 % for the same period.

However, the biggest gain during this period has been observed in the case of world gold funds. Currently, there are only two such funds in the country — DSP BlackRock World Gold Fund and AIG World Gold Fund — and both these funds have shown an outstanding recovery. While the former’s one-month trailing returns stand at a handsome 43%, the latter has managed to generate 35.2% during the same period.

These gains can be attributed to the outstanding recovery seen in the stock prices of gold mining companies across the globe. Over the past one month, the stocks of many of the gold mining companies in which these gold funds invested have generated high returns ranging from 48-70 %. These include stocks like New Crest Mining, Barrick Gold Corp, Newmont Mining, Lihar Gold and Randgold Resources, among others. The FTSE All Gold Mines Index and S&P 500 Gold Index have both returned about 65% during the period.

Gold funds are different from gold exchange-traded funds (ETFs) and should not be confused with the latter. Gold funds are MFs that invest primarily in the stocks of companies that are actively into mining of gold and other precious metals like platinum, silver and also diamonds. Gold ETFs, on the other hand, invest solely in pure gold. Since gold funds invest in equities of gold mining companies, their correlation with the equity market is much higher than that with gold bullion, and hence, they are known to move in tandem with the equity market.

Both gold and equity have gained momentum in the past month, despite the commonly known inverse relationship shared by these two asset classes. While on the one hand, the BSE Sensex has gained about 12.7% since November 18, ’08, on the other hand, gold prices in India have risen about 10% since then. If one were to analyse the returns on a global scale, international gold prices have gained about 17%, while the Dow Jones has increased about 5% over the same period. Hence, it is interesting to see these two asset classes moving in sync with each other, even though they had a high negative correlation over the past one year, at -0 .5.
While it has not been long since the first gold fund was introduced in India, its performance over the past one year throws up some interesting
Gold
trends. The country’s first gold fund gained immensely in the beginning of the current calendar year, when equity markets across the globe had begun to slide.

Gold funds and gold ETFs had both gained immense popularity then, as they were among a handful of products which generated positive returns in a highly negative terrain. However, the financial crisis that gripped markets across the globe also enveloped gold funds, indicating that gold funds are influenced more by movements in the equity market than by gold prices.

However, the two gold funds in India are not active schemes, but rather the feeder funds. Thus, instead of investing directly in stocks, these funds invest in mining companies through another fund, which is the parent fund incorporated outside India.

While DSP BlackRock’s gold fund is more than a year old in India, AIG’s fund was launched in the current calendar year and has just completed about six months. However, the parent funds of both fund houses are more than a decade old. While BlackRock Global Funds — World Gold Fund was launched in 1998, AIG PB Equity Fund Gold was initiated way back in 1992.



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