DSP World Gold Fund is changing its path. It will be called DSP World Gold Fund of Funds.
The scheme, India’s first that invests in an overseas mutual fund that buys shares of gold-mining companies, will now also invest in exchange-traded funds (ETFs) that invest in shares of gold miners.
This fund used to invest its entire corpus in Blackrock Global Funds – World Gold Fund (BGF). Now, in addition to the Blackrock fund, it will invest in VanEck Gold Miners ETF, iShares MSCI Global Gold Miners ETF and VanEck Junior Gold Miners ETF, among other, which offer exposure to shares of gold miners.
All this, after the scheme returned 33.82 percent in the three months ended January 23.
The fund house wants to diversify risk. BGF is an actively managed scheme and investors face the risk of earning less returns than that offered by the benchmark. By introducing other passively managed schemes, DGF aims to reduce the risk arising out of concentration.
Expenses charged by passively managed ETFs are generally lower than those of actively managed ETFs. BGF charges expenses at 1.05 percent of assets under management, whereas ETFs charge 0.5 percent to 0.6 percent.
“Gold mining is a cyclical industry and investments in this theme are done as a tactical allocation,” said Sahil Kapoor, head – products and market strategist, at DSP Mutual Fund. “Inclusion of ETFs in permissible investments will help bring down the costs of the scheme, which works for the product in the long term.”
A lower expense ratio means better returns for investors, other things remaining the same. Shyam Sekhar, chief ideator at ithought Advisory, sees the change to lower costs marginally good for investors.
The exact quantum of reduction in the expense ratio depends on the mix the fund manager decides between active and passive investment strategies.
By investing in units of overseas ETFs, the fund house ensures that the scheme has an avenue to invest money received, just in case the overseas limit set on units of overseas mutual funds gets hit soon.
Mutual funds as a whole can remit up to $7 billion for the purchase of shares and units of mutual fund schemes listed overseas. The limit was reached in February 2022 and funds had to stop accepting inflows.
In June 2022, mutual funds were allowed to accept fresh inflows only to the extent of the stocks they sold overseas and to the extent of the limit reached by each fund house as on February 1, 2022.
While these led to changes in mutual funds’ operations of international schemes, one segment that remained relatively unaffected was fund of funds investing in units of ETFs overseas. These schemes have a separate overall limit of $1 billion, which was not breached.
In this context, the inclusion of ETF units as a permissible investment works in favour of all stakeholders.
“We expect the limit set on the overseas investments by Indian mutual funds to go up in future. It is an incidental benefit that DSP World Gold Fund can invest in units of ETFs, which is a separate segment of overseas investments for mutual funds,” said Kapoor.
Since the scheme’s fundamental attributes are being changed, the fund house has allowed existing investors to exit without any load, in line with regulations. However, exiting is not mandatory. The load-free exit window opens on February 1 and closes on March 2, 2023.
Those who stay invested indicate their consent to the changes of the fundamental attributes of the scheme.
Investments in gold mining require understanding of the sector fundamentals. Gold prices are trending upwards, which should be favourable to gold miners. Sekhar is bullish on gold and gold miners.
“Gold prices are expected to move upward, which will add to profits of the gold miners. Since most of these gold miners are not in capital expenditure mode and their balance sheets are much healthier than what they used to be a decade ago, these look attractive. As profits rise, valuations are going to be even more attractive,” he said.
Though analysts expect gold prices to go as high as Rs 63,000 per 10 grams in 2023, they are not expecting linear growth.
Gold miners benefit from rising gold prices and show even better returns than that given by gold. However, if gold prices collapse, miners tend to get butchered as their decline is steeper.
“Investing in high beta gold mining ETFs can help to generate higher returns when the price of gold is rising, which can be beneficial for investors looking for higher returns during the bullish phase of gold,” said Rajat Dhar, director of Indian Investors Federation.
When gold prices went up in the recent past, the equity markets, too, went up. That positive sentiment also contributed to the performance in the recent past. If gold prices go up but sentiment in the equity markets is not good, then the returns may not be as spectacular.
Beginners who do not have a positive view on gold mining or access to expert advice are better off staying away from this offering. This scheme suits only informed investors who understand the associated risks and rewards. Investors need to time both entry and exit in such thematic offerings to make money.
