Gold Guide

7/30/2019 Gold Guide

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Foreword

Many of us buy gold with an emotional touch. And why not, the glitter which it presents and the feeling of

content it gives are truly worth it. This emotional aspect draws many of us towards purchasing gold in a

physical form.

But, have you wondered if buying gold in a physical form is indeed the smart way for you. With uncertainty

looming around in the global economy, having gold in your portfolio has become imperative. However, would

holding gold the physical way be a prudent thing for you when you need to accumulate over turbulent times.

In contemporary times and in the world of financial exuberance, reckoning the perils of holding physical gold,

PersonalFN vide this guide endeavours to educate its investors with the unconventional ways in which you

can invest in gold, the smart way.

Investing in gold in the unconventional way is a different ball game altogether as compared to buying it in its

physical form. It requires some basic understanding of the investment avenues which help you take

exposure to this classic asset class. But we are sure that, the merits of investing in gold the unconventional

way will convince you to be a smart investor.

Through this guide, we have tried to capture our expertise and experience to your benefit, and we hope it will

be informative reading and wish you a VERY HAPPY & SMART INVESTING!!

TeamPersonalFN


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Disclaimer

Quantum Information Services Private Limited (PersonalFN) is enrolled as AMFI Registered Mutual Fund Advisor (ARMFA) under

AMFI Registration No. ARN- 1022 and adheres to AMFI Guidelines and Norms for Intermediaries (AGNI), and all its employees

engaged in distribution of Mutual Fund products have passed the prescribed AMFI certification examination. This is a generalized

Service, provided on an "As Is" basis by PersonalFN. PersonalFN and its affiliates disclaim any warranty of any kind, imputed by the

laws of any jurisdiction whether in or outside India, whether express or implied, as to any matter whatsoever relating to the

Service, including without limitation the implied warranties of merchantability, fitness for a particular purpose. PersonalFN will and

its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any

direct/indirect loss or liability incurred to the user or any other person as a consequence of his or any other person on his behalf

taking any investment decisions based on the above recommendation. This is not a specific advisory service to meet the

requirements of a specific client. Use of the Service is at any persons, including a Client's, own risk. The investments discussed or

recommended under this service may not be suitable for all investors. Investors must make their own investment decisions based

on their specific investment objectives and financial position and using such independent advisors as they believe necessary.

Information herein is believed to be reliable but PersonalFN does not warrant its completeness or accuracy. The Service should not

be construed to be an advertisement for solicitation for buying or selling of any securities. All intellectual property rights emerging

from this guide are and shall remain with PersonalFN. This guide is for users personal use and the user shall not resell, co py, or

redistribute this guide, or use it for any commercial purpose. Please read the Terms of Use on the website www.personalfn.com.


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Index

Section I: Gold - An alternative asset class 5

Story behind unique status granted to gold

Importance of Gold for an Individual Investor

Section II: How is gold put to use? 10

Section III: How one can invest in gold? 12

Conventional vs. Unconventional ways to invest in gold

Investing in gold the conventional way

The unconventional way of Investing in gold

Changing trends in investing in gold

Section IV: The smartest way of investing in gold? 20

Performance of gold funds

How to choose right gold fund

Section V: An ideal asset allocation in gold 23

Section VI: Where are gold prices headed? 26
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Section I: Gold - An alternative asset class

Gold has always occupied the centre stage in the evolution and development of monetary system in the

known human history. In contrast to other major asset class such as equities - which derive their value from

the underlying businesses, or real estate - which could provide rental yields for you along with a potential for

capital appreciation, or debt - which pays regular interest; gold possess no such distinctive characteristic(s).

But having said that, let us apprise you that it is considered be a store of value, as it enables you to combat

the rising cost of living over the long-term and therefore also acts as a hedge against inflation. To understand

in true sense, why gold has retained such a unique status for so long; we must have a quick look into the

history.

The seeds of modern trade and commerce were sowed thousands of years back when barter system of

transaction was practiced. But since the barter system had its own shortcomings, there was a transitiontowards commodity money and in the next step of evolution commodity money was replaced by the paper

currencies. Almost every country then issued its own currency backed by the fiduciary guarantee of its

Government. Further the development of multi-lateral trade gave rise to exchange of currencies among

businessmen. Currencies issued by stronger and stable governments were accepted even outside the

issuing country. Traders and other money agents followed a practice of keeping reserves of such currencies

which gave them flexibility in doing business.

In the post second world war era, epicenter of power and authority shifted from Europe to transatlantic region

with weakening of the United Kingdom. The United States of America (U.S.A.) emerged as a much stronger

nation (than it was in pre-world war times) and the U.S. dollar replaced pound sterling as a reserve currency

of the world. The U.S. adopted gold standards and the dollar was backed by the American gold reserves.

The rest of the world perceived the U.S. dollar more valuable than gold hence the domestic currencies of

other nations were linked to the movement of the U.S. dollar (which in turn was backed by the gold

reserves). In 1960s dollar reserves with other nations far exceeded the value of gold reserves with the U.S.

Finally, in 1971 the U.S. Government discontinued tying its currency with gold reserves and urged other

countries to revalue their currencies against the U.S. dollar. In absence of any alternate currency, the U.S.

dollar still dominated the reserve assets but lost value against gold. In other words it means purchasing

power of gold was still intact while the U.S. dollar kept on losing its purchasing power.


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Gold: The Eternal Store of Value

(Source: World Gold Council, Federal Reserves, PersonalFN Research)

The chart above depicts the cumulative appreciation in gold prices and the rate at which the money in

circulation has grown, taking 1971 as the base year. It is noteworthy that in the past 40 years the gold has

appreciated by a whopping 4,500%, while money supply has expanded 1,475%. Yes, there have been time

periods when the movement in gold was disproportionate to monetary expansion, but over the long-term the

excess supply of the U.S. dollar (highlighting debasement), has led to the precious yellow metal being bold in

value. But thats not all; there have been host of other factors too that helped to pave the upward path for

gold prices, although volatility remained inherent.

Monthly Volatility in Gold Prices (US Dollar)

(Source: World Gold Council, PersonalFN Research)
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The chart above exhibits that geopolitical events such as global uncertainties, war like situation, economic

turmoil and financial crisis too paved the path for gold. But it is noteworthy that, there is, a common element

among all the events affecting gold prices. Thus, it is vital to underscore the point that uncertainty arising out

of these crises threatens to put world economic progress in serious trouble. The currencies can maintain

their value only if the underlying economy remains strong. In other words, economic progress in the country

can substantially impact the purchasing power of that nation. Gold acts as a hedge against all uncertainties

that tend to affect the world economic progress.

Importance of Gold for an Individual Investor..

As an investor you need to own gold since it shares the negative correlation with some commonly held asset

classes. As seen above, gold is commonly held for its trait of being a hedge against economic and political

uncertainties. Therefore, even individual investors should hold gold as a defensive asset.

The diagram below describes, how in times of economic gloom when all the other asset classes are

yielding negative real returns; the precious yellow metal can be savior to ones portfolio and can act as an

effect diversifier and depict its trait of being a defensive asset class.

On the other hand when the world economy is booming, gold becomes relatively unattractive when

compared to equity, debt and real estate. So, typically in times of economic boom, gold either tends to

descend to an extent, or may move in a phase of consolidation, if in the interim although boom persists,

there are certain worries which are swirling in the backdrop.

Lower Credit Offtake

Lower interest rates to

encourage credit growth

Lower interest rates means

lower returns on debt

instruments

Lower returns on debt

meaning lower real returns

which in turn means higher

liquidity preferences

Economic

Gloom

Drop in corporate

profits. Equity becomes

unattractive from

investment perspectives

Makes Gold

Attractive
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S&P 500 Measured by Troy Ounce of Gold

(Source: World Gold Council, ACE MF, PersonalFN Research)

The chart above depicts as to how many times the S&P 500 can be bought with a troy ounce of gold. It is

found that gold has always maintained its purchasing power against the equities in the long run. However, it

diminishes when equities are strong, but weaker equity markets give way to strong market for gold.

Falling Yield on US Treasuries Surging Gold Prices

(Source: World Gold Council, US Department of the Treasury PersonalFN Research)
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Similarly, falling yield on treasuries too makes gold attractive. As seen in the above charts, the yield on 10

year U.S. treasury bonds fell from about 6% in July 2006 to 1.5% in July 2012. Such a dramatic fall in the

U.S. treasury yields pushed gold prices to unprecedented levels. From U.S. $560 per ounce in October

2006, the gold prices rose to about U.S. $1,895 per ounce in September 2011.

Thus, the main reason why one must have gold in the portfolio is to hedge against turbulent and uncertain

times. Moreover, one must stay invested in the said asset class with a very long-term investment horizon (of

say 10 to 15 years) and refraining from speculating during a volatile phase of the said asset class.

At this juncture, you must be eager to know, how you can make the best use of gold, how this glittering asset

class can become a part of your portfolio and which is the best or the smartest way to invest in gold. Let us

see how this is possible.


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Section II: How is gold put to use?

As we have now highlighted on how gold is a significant asset class and also its importance for a retail

investor. Now lets see the various uses of gold and how you as an individual can make the best use of theirgold holdings.

Store of Value: Gold is a long-lasting metal, which can last for ages. It being a precious metal has been

used for exchange and has lasted as money for centuries. As governments in the developed nations have

ability to increase the circulation of their paper currency by printing more money, which in turn reduces its

value; the circulation of gold can be increased only through mining which is not an easy task for

Government. And hence gold retains its value better as compared to paper currency.

Reserve Currency: Having store of value, the central banks and government of various nations aim to

maintain gold reserves in order to secure their position. The central banks use these reserves as a

guarantee to cash in their promises and pay their depositors and note holders.

Hedge against economic pressures: Gold being a precious metal is also used as hedge against financial

distress like inflation, deflation and currency devaluation. Due to frequent changes in the supply of money in

the system, the value of currency can inflate or deflate. Hence holding gold can help one hedge such risk of

devaluation of money which might be lying in their bank accounts and lockers.

Industrial demand: Though not as high as silver, gold has some industrial demand too and is being used in

thermal and electrical conductors. Apart from this gold also has some medical and dental use too.

Jewellery / Ornaments: In terms of volume, India is one of the largest consumers of gold. People in India

have special fascination and emotion for gold. They buy gold especially in the form of jewellery on

auspicious occasion like marriage, festivals and social events. Many Indians, like to hand down their gold to

the next generation in the form of jewellery and ornaments. The change in design and fashion can however

be taken care by jewellery recycling, where old gold ornaments can be used to melt and form it into new

ornaments.

Investment: Purchase of gold jewellery may not always be termed as investment, as people hardly sell their

physical gold jewellery and booking profits when prices go up. Conventionally for investment purpose,people prefer to buy gold bar and coins in physical form. Though gold bars and coins may not have social

use, it can still be used as a long-term asset and also liquidated during any swift up move in gold prices.


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Portfolio Diversification: Gold is termed as a hedge against inflation as it has ability to take care of

currency devaluation. In conditions where productive asset classes like equity, debt and real estate

investment face the risk of losing value, due to fall in currency value, gold can come to rescue. Also if these

productive asset class are unable to adequately compensate individuals with inflation adjusted returns, then

demand for precious metals like gold tend to increase. Hence it is recommended to hold a slight portion of

ones investment portfolio in gold to diversify such risk across asset class.

Pledging for Emergency Needs: Many banks and gold financing companies have started offering secured

loans to individuals, who wish to pledge their gold at a reasonable interest rate, for a pre-specified tenure.

The interest on such loans is lower as compared to personal loans. So, gold can be instead used for raising

short-term finance upto 80% of the golds value, for a nominal rate. Individuals with gold lying ideal in their

locker can pledge their gold to meet their short term financial needs. Thus it is not necessary to sell your gold

to raise money in case of emergency.


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Section III: How one can invest in gold?

Chapter 1: Conventional vs. Unconventional ways to invest in gold

Now, having recognised why gold is an inevitable investment option and why it should be held for defensive

consideration in your portfolio and as an investment diversifier; let us look at various ways through which you

can take exposure to this precious yellow metal. While many of you may be aware of the various ways in

which you can invest in gold, it is imperative that we delve a little deeper and gain clarity onto which is the

smart way of holding this precious yellow metal.

Investing in gold the conventional way

Very often, many of the investors prefer to invest in gold the conventional way. Yes you got it right by

purchasing gold in a physical form i.e. in the form of gold jewellery or coins or bars as buying into the

precious yellow metal is driven by emotions. Also, many often prefer to invest the conventional way, as they

can touch, feel and see their gold holdings and thus be contented with the tangibility factor. But it is

noteworthy that, this feeling of contentment by buying physical gold comes at a price, as there are some

major disadvantages of buying and holding gold in a physical form. They are:

Holding cost: Holding gold in a physical form comes at a holding cost. Holding cost refers to the cost of

holding a security. Hence, the locker rent which you pay for stacking your gold in the bank locker (in order to

protect it from theft or burglary) constitutes to be your holding cost.

Quality: Unless the gold which you buy is from a reliable source, the quality of the same is always under

question, thus resulting in your precious asset losing its true value. Thus, say if you buy a certain amount of

gold from your jeweller and sell the same piece of gold (either coins or bars or jewellery) to another jeweller,

then the quality of your gold will always be questioned.

Premium: Very often jewellers and banks sell gold coins and bars at a premium, to the market price. This

premium is usually in the range of 5% - 10% (inclusive of making charges) in case of jewellers and upto 15%

in case of banks. So, in that sense the pricing of gold varies depending on the vendor. Thus, ultimately you

always pay a higher price to acquire your gold in the physical form.
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Resale Value: While selling your physical gold, you must have encountered some horrendous experiences

of your gold merchant telling you this is not 100% pureit has some mixing, thus questioning the quality of

the gold held by you. Moreover, even if the quality of the gold held by you is of

the finest purity, the making charges will be deducted while converting your gold into jewellery. And as

regards the banks are concerned, they will refuse to buy-back your gold (as they are not allowed to do so

due to the RBI regulation).

Tax: If you are a gold bug, then you would also be axed by wealth tax on the value of physical gold held by

you. Moreover, in order to be eligible for long term capital gains, you need to hold your physical gold for

more than 3 years. Thus, if you were to sell your gold holdings within 3 years for any reason whatsoever you

would be liable to capital gains tax based on your marginal rate of taxation.

If the aforementioned demerits have indeed made you jittery and re-think regarding your gold holdings in a

physical form, then you may now be wondering what could be a better or smarter way you can invest in the

precious yellow metal. Well, there are other investment options to invest in gold which enable you to enjoy

the absolute advantage of the precious yellow metal (which are explained hereunder), but all you need to

simply do is, dissuade from enjoying the tangibility offered under physical gold buying.

The unconventional way of Investing in gold

The unconventional way of buying gold facilitates you to invest in gold in a non-physical form i.e., either

through paper form or even in non-paper form (which is electronic form), but they offer the advantages of

investing in gold. Such investment options are:

Gold Exchange Traded Funds (Gold ETFs): Prior to understanding Gold ETFs, lets first understand what

is meant by Exchange Traded Funds (ETFs). ETFs are instrument, offered by mutual fund houses and are

listed on a stock exchange. They represent ownership in an underlying security, commodity or asset. Hence,

now to put it simply, a Gold ETF is an instrument that represents an ownership of gold assets. This gold is

held on your behalf by an appointed custodian for the ETF.

When you buy a Gold ETF, you get a contract indicating your ownership in gold equivalent to the rupee

amount of your investment. They are a kind of open-ended funds which track prices of gold, and each unit of

gold in the fund that you can buy, is equivalent to 1 gram of gold (some fund houses also offer 1 unit at 0.5

gram of gold). However, the drawback here is, you will never get to see the gold you own you will only
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have a contract that represents your ownership interest. However, you may be allowed to convert your paper

gold into a physical gold, only when you have gold units equivalent to 1 Kg.

Since, Gold ETFs are listed and traded on a stock exchange you can transact (i.e. buy and sell) in them on a

real-time basis. But to own them you need to open a demat account along with a share trading account with

a broker. While transacting in Gold ETFs, you would be required to simply call your broker

and place your orders (at the prevailing market price), or do the same with the online trading application

provided by your broker.

Gold Savings Fund: Gold Saving funds (also known as gold funds), is another relatively new breed of

unconventional way to invest in gold. Gold Saving funds are generally fund of fund schemes which invests

their corpus into an underlying Gold ETF which benchmark their performance against the physical prices ofgold. Hence by doing so, they attempt to provide returns that closely correspond to the returns of its

underlying Gold ETFs.

Even though "Gold Saving funds" are passively managed, the most wonderful thing about them is that, they

provide you the opportunity to invest in gold without really having to worry much about how to store it

physically, since units are allotted to you. But here, unlike Gold ETFs (where you hold units in your demat

account); in gold funds you are allotted with units of the fund in a paper form (it reflects in the mutual fund

account statement).

The annual expenses charged by Gold Savings funds may be comparatively higher than what is charged for

Gold ETFs, as it includes the additional fund management cost along with the cost of Gold ETFs. Thus

investors having a demat account, may find it cheaper to buy Gold ETFs instead of applying in this fund.

However for investors not having demat account, gold funds may be cost effective investment option for

investing in gold in a paper form, because here you do away with the annual charges of holding a demat

account (which you incur while holding Gold ETFs). Moreover, gold funds apart from lump sum investing,

offer the Systematic Investment Plan (SIP) mode, which is effective and convenient way of investing

regularly in gold.


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E-Gold:E-Gold is another unique way to invest in gold in electronic form . Launched by the National Spot

Exchange Limited, E-Gold allows you to invest in gold through its online platform wherein you can buy and

sell units. However, in order to transact in E-Gold, one requires to open a demat account with any of the

Depository Participants (DPs) empanelled with NSEL.

Taking into account the secular uptrend in gold which may pinch your pocket (while buying), E-Gold allows

you to buy gold in smaller denomination such as 1, 2, 3...grams. The transacting pattern of this product is

similar to the cash segment of the equity markets, where the E-Gold bought by you will be settled on a T+2

basis (i.e. Trading day + 2 days). Meaning if you buy E-Gold today, the same will reflect (get credited) in your

demat account 2 days from the date of purchase. Similarly, if you have sold today, the same will reflect (get

debited) in your demat account 2 days from the date of sale.

However, before opting for this option you should keep in mind the charges that you would have to pay.

Under this option you would have to pay a transaction charge of Rs 20 per lakh of turnover. Moreover, since

physical delivery of gold is possible under E-Gold, you are also required to pay storage charges of Rs 0.60

per unit of E-Gold held by you under your demat account. Apart from this, if you wish to take physical

delivery of gold (available denominations are 8gms, 10gms, 100gms and 1 kg) then you will be liable to pay

VAT charges and octroi charges as well.

Now, that you are aware of the various unconventional ways to invest in gold, let us swiftly cruise through the

advantages it accrues to you as an investor in gold:

Convenience:The primary advantage which youll derive by holding gold in non-physical form is that youll

do away with the physical holding of gold and therefore not incur holding cost thereto. This will provide relief

to you in terms of the security aspects as well, which are typically associated with holding physical gold.

Low cost: The only cost which you will be incurring here is the cost of maintaining a demat account and

trading account with a broker, and the nominal brokerage for each transaction. Moreover, if you intend to

hold Gold Savings fund, even the charges of maintaining a demat account are done away with. Finally, there

are annual recurring charges which are charged to the fund. Hence the locker rent, which is rather

substantial part of the holding cost, is done away with.
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Quality: The biggest advantage of the unconventional form of holding gold is that y ou dont have to worry

about the quality of the gold which you hold. As per the Securities and Exchange Board of India (SEBI)

regulations, the purity of underlying gold in Gold ETFs should be 0.995 fineness and above.

Premium: Unlike physical gold buying where many of you may have encountered the horrendous

experience of the gold vendor charging a premium; transacting in Gold ETFs and E-gold is at the prevailing

market rate, while for a gold fund, it is at the NAV. Thus there is no question of you shelling out more to fill

the pockets of anyone who is selling gold be it a gold merchant or banks.

Resale value: Likewise, unconventional way of investing in gold facilitates you to sell your gold holdings with

ease at the prevailing market price. So if you hold Gold ETFs or E-gold, you can simply sell any number of

units (subject to the existing units held by you) in the secondary market on a real-time basis at the prevailingmarket price at any time during the trading hours of the exchange. Thus, this precludes you from

encountering horrendous experiences, which you otherwise face while selling physical gold (where the

jeweller doubts the quality of gold held by you - and therefore pays you a less price, while in case of

jewellery, deducts making charges which are added while buying gold). And as regards banks are

concerned, they refuse to buy back gold (due to RBI regulation).

Taxation: Tax implications on Gold ETFs and gold funds are same as those on debt mutual funds. A unit of

a Gold ETF or gold fund that is held for less than twelve months is treated as a short-term capital asset.

Gains on the same are taxed at your marginal rate of tax (i.e. as per your income slab). Units held by you formore than twelve months are treated as long-term capital assets, and would be subject to long-term capital

gains tax at 20% (after allowing for indexation benefit) or 10% (without indexation benefit), whichever is less.

However in case of E-gold, the gains made within a period of 36 months (known as short-term) from the date

of acquisition of the units will be subject to short-term capital gains tax at the marginal rate of taxation, while

if gains are made after a period of 36 months from the date of acquisition of the units (known as long-term

capital gains), they are taxed at 20% as long-term capital gains tax.


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At a glance

*Annual recurring expenses may vary from fund house to fund house

(Source: PersonalFN Research)

Chapter 2: Changing trends in investing in gold

The advantages of investing in gold through the unconventional way as discussed in the previous chapter,

has caught a lot of investor attention. Now, smart investors like you prefer the unconventional way to invest

in gold as seen in the rising Assets Under Management (AUM) of Gold ETFs. The AUM of

Gold ETFs has risen from Rs 4,800 crore in April 2011 to Rs 11,525 crore in February 2013, an absolute rise

of 140%.

AUM of Gold ETFs

(Source: ACE MF, PersonalFN Research)

E-Gold Gold ETF Gold Savings FundBars/Coins from

Banks

Bars/Coins from

Jewelers

Purchase and Sale Demat Demat Demat / Physical Physical Physical

Physical deliveryPossible for anynumber of units (as

reflected in demat

account)

Possible only above 1kg holding (as

reflected in demat)

Not Allowed Already exists Already exists

Physical delivery centers Multiple Single N.A. Single Single

PricingLinked to Indian gold

prices

Linked to international

gold prices

Linked to international

gold prices

May differ from bank

to bank due to the

premium charged

May differ from Jeweler

to Jeweler due to the

premium charged

Impurity Risk Cannot exist Cannot exist Cannot exist May exist May exist

Security of the assetTaken care by the

exchange

Taken care by the

custodians of the

mutual fund house

Taken care by the

custodians of the

mutual fund house

Responsibilty of the

investor

Responsibilty of the

investor

Resale

Transparent - At

secondary market

prices

Transparent - At

secondary market

prices

Transparent - Based

on NAV

Banks refuse to

buyback gold

At a discount to

existing price, as they

deduct making charges

Convinience of buying,

storage and sellingHigh High High Low Low

Annual recurring expenses

(Storage, insurance and

annual ma intenance)

0.60% 1.00%* 1.50%* High locker rent High locker rent

Conventional Gold Invesment Options

Parameters

Unconventional Gold Invesment Options
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Not only this, as the world grips into the fear of a slowdown in the developed nations like Europe and United

States, central banks worldwide have built up gold reserves in order to shield themselves against the

economic adversities. This is evident from the amount of gold holdings various nations have built up as a

percentage of their forex reserves.

Heaping up gold!

(Source: World Gold Council, PersonalFN Research)

Looking at this you might feel, why not buy into a gold mining company (by owning gold mining funds), when

everyone is taking refuge under the precious yellow metal amid uncertainty surrounding the global economy.

But, before you take any such decision, think again! Also, it is not true that any investment avenue related to

gold would do well to your portfolio.

World Gold Mining Funds: Are they a treasure for your portfolio?

Many investors live under the impression that by investing in gold mining funds, theyll be able to bet on the

movement of gold prices. Well thats not the case!

Gold mining mutual funds are feeder funds that invest in offshore funds investing in stocks of gold mining

companies. The investments in gold mining fund is linked to both gold price movements and volatility in

equity markets, as these funds bet on stocks of gold mining companies. These funds have shown high

correlation to equity markets and relatively less correlation to gold price movements. So, when equity
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markets perform well, they too perform well. Hence, these funds are suitable only for those investors who

have a high risk appetite.

How gold mining funds have fared?

Absolute (%) CAGR (%) Risk Ratios

Scheme Name1

Mth3

Mths6 Mths 1 Yr 2 Yrs 3 Yrs 5 Yrs SI SD Shar

DSPBR World GoldFund (G)

-6.5 -19.2 -26.3 -18.8 -8.3 -0.1 -2.1 7.1 6.15 -0.0

PineBridge World GoldFund (G)

-5.7 -19.8 -29.8 -19.9 -12 -0.4 - 2.7 6.99 -0.0

Gold-International -1.3 -6.4 -10.1 -4.1 6.4 12.3 9.5 - 4.89 0.11

Performance as on March 15, 2013. Given the daily performance of the funds Benchmark, i.e. FTSE Gold Mines, is not available in

public domain, we have compared the funds with International Gold Prices. Standard Deviation and Sharpe Ratio calculated for a 3 year

period with 7.38% as the risk free rate


Clearly, from the table above it is evident that the gold mining funds have not been able beat the prices of

international gold in the last 1, 2, 3 and 5 years time frames on account of the turbulence felt by the equity

markets.

Performance across market cycles for gold mining funds

Scheme Name

BEAR PHASE BULL PHASE CORRECTIVE PHASE

09-Jan-2008-

09-Mar-2009

09-Mar-2009-

05-Nov-2010

05-Nov-2010-

15-Mar-2013

PineBridge World Gold Fund (G) - 44.7 -11.2

DSPBR World Gold (G) -19.8 37.7 -10.0

Gold-International 5.6 27.4 5.7


This reveals that the gold mining funds are more driven by the equity markets and less by the gold prices.

Hence, it makes less sense in investing in an avenue which does not closely track gold prices, but on the

contrary have exposure to equity of companies which are engaged in gold mining activity. It is noteworthy

that in an uncertain global economic environment, it is imperative that you invest in gold per se, in order to

take refuge, rather be invested in gold mining funds.

Thus, gold mining funds are surely not a smart way to invest in gold.


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Section IV: The smartest way of investing in gold

By now, you may have reckoned that unconventional way of investing in gold is indeedthe smartest way to

invest in gold, for the host of advantages it offers. But within the unconventional way too, you need to choose

the right investment avenue (from options such as Gold ETFs, gold funds and E-gold) for you to benefit from

your investment. Choosing the right investment avenue according to your risk appetite, income levels,

investment preferences, etc. is imperative. Let us go through the different avenues, once again available

under the unconventional way of investing in gold, for you to make a prudent investment decision.

Gold ETFs:As an investor, if you want to make lump sum investment in gold, which you can hold in the form

of units in your demat account and if at the same time you are looking at ease in transacting (since they are

listed on the exchange), then Gold ETF is the right investment option for you. But you ought to be ready to

bear the demat account charges levied by your broker.

E-Gold: Likewise, you could also invest in E-gold if you have a demat account and wish to take physical

delivery of gold in relatively smaller quantities like 8gms or 10gms at a later stage. But one must keep in

mind the extra costs you have to bear for rematerializing your gold investments, along with other transaction

costs.

Gold Savings fund: On the other hand if you do not have a demat account or do not want to open it anytime

soon, but still wish to buy gold the unconventional way, then Gold Saving funds is the appropriate investment

option for you. Apart from a lump sum investment, this investment option also facilitates one to invest in gold

through the SIP mode of investing. So, in case if you want to buy gold on a regular basis - the systematic

way, then Gold Saving funds are a right fit for you.

At this juncture it would be resourceful enough to peep into the performance of Gold ETFs and Gold Savings

funds which will help you in making an informed decision.
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How Gold ETFs have fared!

Scheme NameAbsolute CAGR

TrackingError*

ExpenseRatio

%Holdingin Cash

Hoin1 Mth 3 Mths 6 Mths 1 Yr 2 Yrs 3 Yrs 5 Yrs

Axis Gold ETF -1.8 -4.7 -8.1 7.2 17.9 - - - 1.00 0.00

Canara Rob Gold ETF -1.9 -4.8 -8.1 - - - - - - 0.00

GS Gold BeES -1.9 -4.7 -8.1 7.4 18.0 19.3 15.7 0.0205 1.00 0.00

HDFC Gold ETF -1.9 -4.8 -8.1 7.4 18.1 - - 0.0202 1.00 0.00

ICICI Pru Gold ETF -1.8 -4.8 -8.1 7.4 18.0 - - 0.0251 0.97 0.00

IDBI Gold ETF -1.9 -4.8 -8.2 7.3 - - - - 1.20 0.00

Kotak GOLD ETF -2.0 -4.8 -8.1 7.4 18.2 19.4 15.8 0.0470 - 0.00

Motilal Oswal Mostshares Gold ETF

-1.9 -4.8 -8.1 - - - - - 1.30 0.00

Quantum Gold FundETF

-1.8 -4.8 -8.1 5.3 18.2 19.4 15.8 0.0005 1.00 0.00

R* Shares Gold ETF -1.8 -4.8 -8.1 7.4 18.2 19.5 15.4 0.0203 1.00 0.00

Religare Gold ETF -1.8 -4.7 -8.1 7.5 18.3 - - 0.0202 1.00 0.00

SBI Gold ETF -1.9 -4.8 -8.1 7.5 18.3 19.5 - 0.0466 0.87 0.00

UTI Gold ETF -1.9 -4.8 -8.1 7.4 18.2 19.5 15.8 0.0204 1.00 0.00

Gold-India -3.5 -6.0 -7.7 6.2 19.4 20.5 17.0 - - -

Performance as on March 15, 2013. Portfolio details are as on February 28, 2013, while tracking is as on September 28, 2012.


How Gold Savings Fund have fared!

Scheme NameAbsolute Returns (%) Expense

Ratio

%Holdingin Cash

%Holding inGold ETF1 mths 3 mths 6 mths 1 Yr 2 Yrs

Axis Gold Fund (G) -3.0 -6.3 -10.1 3.4 - 2.00 -1.19 101.19

Birla SL Gold Fund (G) -3.0 -6.7 -9.7 - - 0.50 0.48 99.52

Canara Rob Gold Saving Fund-Reg (G) -2.6 -5.8 -8.6 - - - 1.68 98.32

HDFC Gold Fund (G) -4.0 -6.9 -10.1 3.0 - 0.50 1.56 98.44

ICICI Pru Regular Gold Savings Fund (G) -2.9 -6.2 -8.8 3.0 - 0.50 2.79 97.21

IDBI Gold Fund (G) -1.9 -4.7 -8.1 - - 0.51 2.29 97.71

Kotak Gold Fund (G) -3.6 -7.3 -10.1 3.5 - - 1.37 98.63

Quantum Gold Saving Fund (G) -2.5 -6.2 -9.2 4.8 - 0.25 0.09 99.91

Reliance Gold Savings Fund (G) -4.1 -7.0 -10.8 3.2 16.6 0.70 -0.16 100.16

Religare Gold Fund (G) -3.1 -7.0 -9.3 3.7 - 0.50 2.17 97.83

SBI Gold-Reg (G) -2.7 -6.0 -9.1 4.5 - 0.63 0.75 99.25

Gold-India -3.5 -6.0 -7.7 6.2 19.4 - -

Performance as on March 15, 2013, Portfolio details as on February 28, 2013. (Source: ACE MF, PersonalFN Research)


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Hence overall if we observe the Gold ETFs and Gold Savings funds have given luring and consistent returns.

But looking at this you might question that if all the ETFs or Gold Savings funds are performing well and

showing identical performance trend, than which is the right fund to choose for investment purpose. Well, for

that you need to cover an extra mile and assess the following for you to select the right one:

Tracking error of Gold ETFs: Tracking error is an important measure for passively managed funds like

index funds and Gold ETFs. It helps you judge how much the Gold ETF has deviated from returns generated

by the benchmark, due to the Gold ETFs holdings in gold and cash respectively. This measure is very

essential for you to assess how much active risk does the underlying Gold ETF takes while delivering returns

vis--vis the actual returns from gold.

Percentage of holding in physical gold: Ideally, you must select a Gold ETF that holds a significant

portion of its portfolio in gold over ones that keep considerable proportion of their portfolio in cash and

equivalent instruments i.e. they may invest in current assets. The impact of such mismatch in the funds

portfolio on its performance can also be disclosed through the tracking error of the Gold ETF.

Expense Ratio: One must also check the expense ratio of the fund while selecting Gold ETF. High expense

ratio charge by the fund means high cost for the investor. A Gold ETF with a lower expense ratio will

translate into higher returns.

So remember, while everything might look appealing as the marketing team of the mutual fund houses give

their best attempt in doing so; it is your responsibility as investors to peep into the details (wherever

available) for you to reap the best returns.


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Section V: An ideal Asset Allocation in gold

Now since youve learnt, what are the various avenues via which you can take exposure towards and known

the importance of the precious yellow metal in your portfolio, at this point in time many of you may be

wondering, how much percentage of your total assets you should be investing in the said asset class. Well,

we consider gold as an alternative asset class and an effective diversifier. Thus in times when inflationary

pressures are evident in our country, the precious yellow metal could be a hedge as well. During turbulent

times such as the one engulfing the global economy at present, gold could be a safe haven. While many of

you may express dissent, looking at the elevated prices of gold; the gloomy global economic outlook,

situation of debt-overhang in Euro zone, slash in sovereign ratings and high fiscal deficit in the domestic

market makes a case for investing in the precious yellow metal, and thus prices are expected to remain firm

too.

Your investment portfolio needs to be complete and this will not be possible without having gold in your

portfolio. Exposure to the three asset classes viz., equity, debt and gold will make your portfolio resilient

enough to protect the downside of your portfolio in uncertain times. However, proportion of the three asset

classes in your portfolio is of utmost importance which will typically depend on your risk appetite along with

other factors.

Whatever your risk appetite is,Gold should always form an integral part of your portfolio; while the debt and

equity portion in your portfolio may change according to the changes in the broader market risk as well as

your risk appetite and nearness of the goal for which you made your investments. This concept of allocating

your portfolio to different asset classes based on your nearness to goals helps not only to diversify your risk

across different asset classes but also in rebalancing your portfolio when you are closer (in terms of number

of years) to the achievement of financial goals. Let us observe in what proportion one can take exposure to

different asset classes based on ones nearness to goal

Portfolio allocation for a time horizon of over 10 years.
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Considering your longer time horizon of over 10 years, you have enough time for your goal and accordingly

you may be ready to take high risk. Around 75% exposure towards equity can help you generate appealing

returns over the long term, while 15% exposure towards gold can help take care of intermediate volatility and

gain from any rally you see in the precious yellow metal. The 10% debt exposure can help you with regular

flow of income and provide cushion to your portfolio during uncertain market conditions.

Portfolio allocation for a time horizon of around 5 years.

With your time horizon being around 5 years, there are chances of witnessing prolonged volatility in risky

asset classes like equities. While asset class like gold holds tendency to see swift upside movement during

economic crisis, any change in sentiments may have some interruption in its upside rally. Your exposure to

debt can help with decent flow of regular income. So with a time horizon of 5 years, it is advisable to have

around 55% of your portfolio towards equity, with 35% towards debt and 10% into gold.

Portfolio allocation for a time horizon of 3 years and below.

And if you have just 3 years left for your goal, then it is time to exit from volatile assets and move towards

instruments that can help you with fixed income over these 3 years. Any intermediate volatility can erode

your wealth there by hampering your goal.
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At PersonalFN, we believe that, you should consider your investment time horizon and accordingly allocate

10% to 15% of your total portfolio towards gold. Gold is not an instrument to make quick money but a solid

long term asset and hence you should ideally invest in gold with a longer investment horizon. The merits

discussed for Gold ETFs and Gold Savings funds, make a case for holding gold vide these two investment

options, and irrespective of your appetite for risk whether risk averse or risk tolerant, one must hold

exposure to gold in their portfolio thereby following the allocation as mentioned above.

So, be smart and invest in gold the smart way too.


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Section VI: Where are gold prices headed?

Well, if we take closely observe of what is happening in the global economy, smart investorsare likely to

take refuge under the precious yellow.

Speaking about the U.S., with the fiscal deal being struck (by the U.S. Senate) at the end of 2012, it has

averted fiscal cliff and therefore imbued confidence. By focusing on increasing taxes and holding back on

stimulus measures, the U.S. seems to show resilience in the intermediate. But the Euro zone debt crisis are

yet sending shivers to the global economy and economic tension continues to prevail. Although bailout

package for Greece and loan restructuring for Spanish bank has been permitted, it may not be too long

before fresh crisis from the Euro zone emerge because the long-term worries yet remain, and even the

stronger nations in the Euro zone such as France have experienced their sovereign ratings being cut. In fact

with Euro zone finance ministers agreeing to an unprecedented tax on Cypriot bank deposits as officialsunveiled a 10 billion-euro (U.S. $13 billion) rescue plan for the country ( the fifth since Europes debt crisis

broke out in 2009), in itself is sending tremors the global markets. It is said that, Cyprus will impose a levy of

6.75% on deposits of less than 100,000 - the ceiling for European Union account insurance - and 9.9%

above that; a measure which will raise 5.8 billion, in addition to the emergency loans . It is believed that the

International Monetary Fund (IMF) may contribute to the package and junior bondholders may also be

tapped in a so-called bail-in. But imposing investor losses in Cyprus could reignite the financial crisis that has

thus far pushed the Euro zone in a situation of debt-overhang.

While most central banks are adopting easy monetary policy (to handle the economic slowdown and their

fiscal situation), it is likely to be supportive for gold. The idea in the western economies of printing more

currency (for it to be used as reserve currency) to solve their sovereign debt crisis seems to inflict more long-

term problems such as devaluation of currency and inflation, for the developed economies and thus may act

a catalyst for long-term trend in gold to remain intact.

In India, with slump in quarter-on-quartereconomic growth, see-saw movement in in industrial activity, twin

deficit problems, risk of sovereign rating downgrade, FDI not kick-starting despite reform measures taken)

and intermediate inflationary pressures perceived; many would take refuge under the precious yellow metal

until this economic concerns do not recede. Every corrective, we think would encourage smart investors to

buy gold and thus despite import duty on gold hike to 6.0%, demand would not deter. In fact as mentioned

above, the rise in import duty on gold could lead to illegal activity such as smuggling of gold, thereby keep

demand buoyant until global economy shows signs of stability.
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So given the above backdrop where long-term economic problems still persist - especially in the developed

economies, and now concerns over Indias fiscal deficit, economic growth rate and sovereign

rating downgrade concerns yet lingering around; we think the ascending move for gold is intact over the

long-term, because smart investors would view gold as a monetary asset rather than mere commodity.


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General Disclaimer: This communication is for general information purposes only and should not be construed as a

prospectus, offer document, offer or solicitation for an investment or investment advice.

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Gold Guide