Confused on where to invest? invest it on gold

Golden age of gains invest

Indians are known for having an affinity towards gold. This has clearly been illustrated in our gold consumption in the form of jewelry demand year-on-year. India is the largest consumer of physical gold. What is also being noticed now is that gold is fast becoming a popular investment option.

As the global economy faces challenges earmarked by uncertainties in the currency markets, gold is becoming a preferred investment choice for institutional and retail investors. Demand and supply dynamics continue to remain favorable. Keeping that in mind, we believe that gold should have a 5-15 per cent allocation in all portfolios as it provides the dual benefits of asset class diversification while also being a very viable investment option. This exposure can be increased or decreased depending upon the risk appetite of the investor.

Exposure to gold can be achieved in various forms, through physical gold (gold bars, coins etc.), Exchange Traded Funds (ETFs) or mutual funds that invest into gold mining companies. While physical gold gives investors tangible exposure to gold, it presents challenges in terms of storage, security as well as unfavorable taxation. ETFs eliminate these disadvantages and provide access to economic value of gold price. Mutual funds investing in shares of gold mining companies, on the other hand, benefit from price appreciation in shares of gold mining companies, which in turn benefit on account of operating leverage due to rising gold prices. Any change in the price of gold gets reflected in the profitability of the mining company and subsequently in its stock price.

DSP Black Rock World Gold Fund was launched more than 3 years ago. Our Gold Fund invests into the largest gold equities fund, Black Rock Global Funds - World Gold Fund, which has a track record of over 16 years. This fund provides investors with exposure to the gold price and the upside of equities by investing into shares of gold mining companies. The fund has consistently outperformed gold bullion in its long history of over 16 years. DSPBR World Gold Fund has outperformed gold bullion in 2009 and YTD 2010, under performing only in 2008 on account of risk aversion towards equities. A good way to reduce equity risk and associated volatility is by making regular investments through a systematic investment plan (SIP), which is a disciplined way to create wealth.

In terms of our outlook, we believe the bullish trend in gold prices will continue, driven by a diminishing supply of gold and increasing demand. Long-term fundamentals remain tight, with little sign of any material increase in supply of Gold. Central Bank selling, which for many years was a notable source of supply, is also at significantly reduced levels. This is obviously positive for gold prices in the long term. In view of uncertainty in financial markets, gold is now being looked at as a safe haven and the demand for gold has been steadily increasing, leading to increase in the gold price. With positive outlook on gold, shares of gold mining companies are likely to benefit even more from higher gold prices.

The author is Executive Vice President DSP Black Rock Investment Managers Pvt Ltd.