Gold Savings Fund - NFO

Question: In India so far one can invest in Gold in the form of ornaments, coins and bars. One can also invest in Gold Exchange Traded Funds (ETFs) in the Secondary Market through Demat and Trading Account. But in 'XYZ Gold Savings Fund' one can invest in gold, lump-sum and also go for monthly investment in gold through Systematic Investment Plan (SIP) like in any other equity mutual fund schemes.

Kindly let me have your advice on investing in Gold and XYZ Gold Savings Fund?

Mr. Gerard Colaco: From any investment parameters, gold is a lousy investment for long-term growth.

Let us first take returns. US$ 1/- invested in the gold in 1802, would have had a value of US$ 32.64/- in December 2006. The same one dollar invested in stocks, with reinvestment of dividends, would be worth US$ 12.7 million in the same period.

Rs. 100/- invested in the BSE Sensex on 1st April 1979 would have a value of Rs. 18,202/- today (14-02-2011). The Compounding Annual Growth Rate (CAGR) works out to approximately 17.7%. Standard gold was Rs. 100/- per gram in 1950. In 2011, 61 years later, it is Rs. 20,285/-. The CAGR is 9.10%.

Second is the factor of safety. Gold is less volatile than equity. But such volatility works in favour of a disciplined and systematic investor over the long-run. Gold also can under-perform for long periods, sometimes a decade or two. Where safety is concerned, no long-term investor has ever had to worry about safety in a diversified equity portfolio or a good piece of real estate in the long run. So a genuine long-term investor does not need the "non-correlated diversification benefit" that gold is supposed to offer.

Third, gold is a sterile investment, offering no cash flows like dividends or rentals that can be reinvested ever if there are no other amounts available to the investor to invest.

The right technique must be used on a good avenue of investment, to get the best out of the good investment. For example, if a parent is planning for the marriage of a daughter, some 5 or 10 years down the line, and thinks that a good amount will have to be spent on gold, an SIP in a well diversified equity fund or index fund should give considerably more returns than an SIP in the XYZ Gold Savings Fund over the said period.

The conclusion is simple. Gold may at the most equal inflation in the long-run. Equity and real estate beat inflation. If there is nothing special about the investment avenue itself, then nothing of value is achieved by debating about whether a lump-sum investment is good or a systematic investment is good.

The XYZ Gold Savings Fund - NFO is nothing but a marketing and AUM-augmentation exercise, capitalising upon the hype for gold because of its current high prices.