Is it time to bet on international gold funds?

New York (Apr 21)  After years of losses, international funds focused on gold and gold miners are up sharply. In the past three months, DSP BlackRock World Gold Fund has spectacular returns of 64.92 per cent and Kotak World Gold Fund is up 64.89 per cent.

"Two factors have affected the performance of fund that bet on gold and gold mining companies. Gold prices have rallied in the past few months. Due to this, the stocks of gold miners are back in demand leading to the stellar performance," says Lakshmi Iyer, chief investment officer (Debt) and head products at Kotak Asset Management.

When gold prices are low, the mining companies shut down mines as their cost of production is higher than the prevailing price of the metal. When the prices rise and mines become viable, the mines that were shut become operational. And profits for the gold mining companies rise. "Stocks of gold mining companies were battered for many years. With gold price rising, we are witnessing value buying in these company stocks," says Iyer.

Iyer feels that the rally would continue in the short term. The outlook for gold is positive given the global economic uncertainties. There's a perception that people are going to flock to gold as the US Federal Reserve is not tinkering with the interest rates. More upside for gold means, more interest in the mining companies' stocks. There's still steam left in the rally that has just started.

But investors looking to benefit should be cautious, warn financial planners and mutual fund analysts. These funds are also highly volatile. Take example of DSP BlackRock World Gold Fund. It's best one-month performance was between November 2008 and December 2008. It returned 43.13 per cent in the period. But between September and October in the same year, it also saw negative returns of -48.22 per cent.

International funds, termed as alternate investments, should not be more than five per cent of the portfolio. In gold mining funds' case, experts said that it can be as low as two per cent. "When a person invests in gold, he is exposed to only one risk, related to the price of the metal. When he invests in a mining company, there is additional risk related to the stock price movement," says a mutual fund analyst.

As these are international funds, their taxation is similar to debt funds. This means, if you sell it within three years, the entire gain will be added to the income and taxed as per the slab. After three years, the investor needs to pay either 10% tax without indexation or 20% after accounting for inflation.

Source: Business-Standard