Investors having a weakness for the yellow market, may consider investing in gold ETFs

Crashing gold prices have hurt investors badly last year. Obviously, the first to take the knock were investors in gold exchange-traded funds or gold ETFs. The other category that took the hit was investors in gold-mining funds. These funds have lost around 40% in the last year.

In comparison, gold ETFs fared better as they lost only 15% during the same period. Since the precious metal continued to be pounded on the bourses almost every day, investors are asking hard questions about these schemes. "Investors take exposure to gold, equity and dollar-denominated assets simultaneously in these schemes.

Their fortunes are linked to the movement of these three variables. The funds have seen an erosion in net asset value due to a sharp fall in gold prices," says Feroze Azeez, director - investment products, Anand Rathi Private Wealth Management. He asks investors to exit these funds.

Fading Fortunes

There are two specific schemes that are dedicated gold mining funds - DSPBR World Gold Fund and Pinebridge World Gold Fund. Also there is one more scheme - Birla Sunlife Commodity Equities Global Precious Metals that invests in shares of gold mining companies among other investments.

These three schemes together managed 731 crore in assets as on March 31. "These schemes are similar to a sector fund, where a fund manager must invest in only one sector - shares of gold mining companies. As the sector falls out of favour, returns dwindle," explains Ashish Shanker, head - investment advisory, Motilal Oswal Wealth Management.

Even as gold prices were rising last decade, the cost of mining gold too has gone up. However, the sustained sharp fall in gold prices last year is expected to adversely impact the profitability of gold mines and investors are shunning shares of these companies," says Shanker. Gold prices are down to $1229 per ounce from a high of $1791, a loss of 31% in the last one year.

Naturally, the net asset values of funds investing in the shares of gold mining companies are plumbing new depths.

The pain would have been even more if it was not for an anaemic rupee. "Thanks to rupee devaluation, the fall in net asset value of these funds is contained," says Abhinav Angirish, managing director, Investonline.in, an online mutual fund distribution entity.

This is because investors in these funds are effectively taking cross-currency bets as fund managers invest in dollar denominated assets. The rupee has fallen from a high of 51.83 per US dollar to 60.73 per US dollar, a fall of 17% in one year.

Similar trend is visible in gold prices, too. While gold is 31% off its peak in dollar terms, it is down 22% in rupee terms when it moved to 25,130 from a high of 32,500 per 10 gram. "If there was no fall in the rupee against the greenback, the losses would have been much more," he adds.