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Should Precious Metals be a Part of Your Portfolio?

Aug 30, 2022





Listen to Edelweiss Gold and Silver ETF Fund of Fund: Should Precious Metals be a Part of Your Portfolio?




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India is one of the largest markets of gold in the world. On auspicious events like Akshay Tritiya, Dhanteras, Deepawali, weddings, etc., Indian households purchase gold. With rising affluence demand for gold is increasing in India. Silver is also considered to be an auspicious metal, apart from its use in jewellery, silver is also used in heavy and new age industries (e.g. solar panels, electric vehicles, smartphones etc). The demand for silver is growing in tandem with the development of new-age technology, but the supply is limited.

However, instead of buying gold and silver in physical form, which invariably contains impurities, risk of storage etc., you should invest systematically in Gold and Silver ETFs. You should consider investing in gold and silver as an asset class since it has the potential of generating capital appreciation for you over long investment horizons.

The Dollar index has an inverse correlation with precious metals. With the US economy weakening and the rate hike cycle nearing its end, the Dollar index is likely to weaken. This may increase precious metals’ prices in the near future, making them an excellent entry point for investors. In the long run, both gold and silver provide a good hedge against inflation and can be used for your asset allocation purposes.

Gold and silver have a low correlation with equities. Gold is usually counter-cyclical to equities. It can bring stability to your portfolio in different investment cycles. Silver usually outperforms gold in bull markets due to higher industrial demand during that period. As a result, it might further diversify your investment portfolio. If investors want to participate in a single precious metals ETF, they can choose a combination ETF that has a 50:50 allocation to gold and silver.

Edelweiss Mutual Fund has launched India’s first-of-its-kind combination fund which provides investors exposure to both gold and silver under a single scheme. Edelweiss Gold and Silver ETF Fund of Fund is an open-ended fund of funds scheme investing in units of Gold ETF and Silver ETF.

Commenting on the NFO, Ms Radhika Gupta, MD & CEO at Edelweiss Asset Management Limited said, “The investment case for these precious twins is very strong as they provide good diversification benefits. Investors can take advantage of gold’s properties to hedge away inflation and leverage the growing use of Silver in the manufacturing of new-age technology products. The Fund of Fund structure provides ease and tax efficiency while rebalancing.”

Table 1: Details of Edelweiss Gold and Silver ETF Fund of Fund











Type An open-ended fund of funds scheme investing in units of Gold ETF and Silver ETF. Category Fund of Fund
Investment Objective The investment objective of the scheme is to generate returns by investing in units of Gold ETFs and Silver ETFs. However, the performance of the scheme may differ from that of the underlying gold and silver due to tracking errors of the underlying exchange-traded funds. There can be no assurance or guarantee that the investment objective of the plan will be achieved.
Min. Investment Rs 5,000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
Plans
Options

  • Growth
  • Income Distribution cum Capital Withdrawal (IDCW)

Entry Load Not Applicable Exit Load

  • If the units are redeemed/switched out on or before 12 months from the date of allotment – 1.00%
  • If the units are redeemed/switched out after 12 months from the date of allotment – Nil

Fund Manager

  • Mr Bhavesh Jain
  • Mr Bharat Lahoti

Benchmark Index LBMA Prices
Issue Opens: August 24, 2022 Issue Closes: September 07, 2022


(Source: Scheme Information Document)

 

The investment strategy for Edelweiss Gold and Silver ETF Fund of Fund will be as follows:

Edelweiss Gold and Silver ETF Fund of Fund aims to invest in a mix of Gold ETFs and Silver ETFs. The scheme endeavours to maintain equal allocation between Gold ETF and Silver ETF and rebalance it periodically. ETFs will be selected based on liquidity on the exchange, tracking error, and other relevant factors. The scheme will be priced based on the closing price of the underlying ETFs on the exchange.

Edelweiss Gold and Silver ETF Fund of Fund: Should Precious Metals be a Part of Your Portfolio?

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The Scheme shall invest in units of Gold and Silver ETFs directly or through the secondary market. Based on various macro/technical/fundamental factors the fund managers shall decide allocation towards units of Gold ETFs and/or Silver ETFs.

A small portion of the net assets will be held as cash or will be invested in debt and money market instruments permitted by SEBI/RBI including TREPS or in alternative investment for the TREPS as may be provided by the RBI, to meet the liquidity requirements under the Scheme.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation for Edelweiss Gold and Silver ETF Fund of Fund










Instruments Indicative Allocations (% of Net Assets) Risk Profile
Minimum Maximum High/Medium/Low
Units of Gold and Silver ETFs 95 100 Medium
– Of which Units of Gold ETFs 35 65 Medium
– Of which Units of Silver ETFs 35 65 Medium
*Money Market Instruments, cash and cash equivalent and/or units of Liquid scheme 0 5 Low


*Money Market Instruments will include only treasury bills and government securities having residual maturity of up to one year, Tri-Party Repos and any other like instruments as specified by the Reserve Bank of India / SEBI from time to time.

(Source: Scheme Information Document)

 

About LBMA (London Bullion Market Association) Precious Metal Prices

The London Bullion Market Association is the international trade association representing the global OTC (Over the Counter) bullion market for precious metals such as gold and silver. LBMA is associated with miners, investors, fabricators, ETFs, refiners, manufacturers, consumers, and central banks from around the world. It serves as a point of contact for regulators, investors, and clients, and, most importantly, it is the voice of the global precious metals market.

The domestic price of gold and silver is derived from the LBMA AM fixing prices, as there is no publicly available index which tracks the price of gold and silver bullion and instruments with gold and silver as underlying. The Trustees reserve the right to change the benchmark in future if a benchmark better suited to the investment objective of the Scheme is available.

Who will manage the Edelweiss Gold and Silver ETF Fund of Fund?

Mr Bhavesh Jain and Mr Bharat Lahoti will be the designated fund managers for this scheme.

Mr Bhavesh Jain has completed his Masters in Management Studies (Finance) from Mumbai University and has an overall experience of 12 years in the equity market segment. He has been associated with Edelweiss AMC for over 3 years, formerly as an Equity Dealer and was previously associated with Edelweiss Securities Limited as SGX Nifty Arbitrage Trader.

At Edelweiss Mutual Fund, Mr Jain currently manages Edelweiss Arbitrage Fund, Edelweiss Large Cap Fund, Edelweiss Recently listed IPO Fund, Edelweiss Equity Savings Fund (Equity Portion), Edelweiss Aggressive Hybrid Fund, Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund, Edelweiss Balanced Arbitrage Fund, Edelweiss Nifty 50 Index Fund, Edelweiss ETF – Nifty Bank, Edelweiss Nifty 100 Quality 30 Index Fund, Edelweiss Greater China Equity Off-Shore Fund, Edelweiss Emerging Markets Opportunities Equity Offshore Fund, Edelweiss Asean Equity Offshore Fund, Edelweiss Europe Dynamic Equity Off-Shore Fund, Edelweiss US Value Equity Offshore Fund and Edelweiss US Technology Equity Fund of Fund.

Mr Bharat Lahoti holds BE (Electronics & Telecommunication) from Mumbai University and MMS (Finance) from N L Dalmia Institute of Management Studies) degrees. He has an overall experience of 15 years in the research function of organizations in the financial services sector. He also has experience in making investments in units of Gold ETFs. Before joining Edelweiss AMC, he was associated with D.E. Shaw India Software Pvt. Ltd. as a Senior Manager – Fundamental Research.

At Edelweiss Mutual Fund, Mr Lahoti currently manages Edelweiss Large Cap Fund, Edelweiss Recently listed IPO Fund, Edelweiss Equity Savings Fund (Equity Portion), Edelweiss Aggressive Hybrid Fund, Edelweiss Balanced Advantage Fund, Edelweiss Nifty 50 Index Fund, Edelweiss ETF – Nifty Bank, Edelweiss Nifty 100 Quality 30 Index Fund, Edelweiss Greater China Equity Off-Shore Fund, Edelweiss Emerging Markets Opportunities Equity Offshore Fund, Edelweiss Asean Equity Offshore Fund, Edelweiss Europe Dynamic Equity Off-Shore Fund, Edelweiss US Value Equity Offshore Fund and Edelweiss US Technology Equity Fund of Fund.

 

Fund Outlook – Edelweiss Gold and Silver ETF Fund of Fund

Edelweiss Gold and Silver ETF Fund of Fund will invest in units of Gold ETFs and Silver ETFs. However, the performance of the scheme may differ from that of the underlying gold and silver due to tracking errors of the underlying exchange-traded funds.

The scheme provides investors with exposure to Gold and Silver the precious metals. Gold & Silver compliments each other, provides a hedge against inflation and it offers a good balance to your portfolio. Gold and Silver have shown a low correlation with equities and hence, offer better diversification. While Gold has huge household demand, silver has huge industrial demand & is used in products like smartphones, solar panels, electric vehicles, etc.

The Fund of Funds structure offers investors more convenience, affordability, & liquidity as compared to physical Gold & Silver. Equal allocation & periodic rebalance can absorb short-term fluctuations in the performance of gold and silver.

However, do note that Gold and silver prices may have a high correlation, but their dynamics are different. Almost always, gold triggers the initial direction of the bullion space followed by silver but with wilder moves on either side. Silver is more volatile in nature than gold since it is an industrial metal. Gold has traditionally been driven by safe-haven demand, whereas silver has been driven by industrial demand. The prices of both move in similar directions but gold is better insulated during economic slowdowns and silver isn’t (due to its uses in industries). Gold has often shown a sharper negative correlation with economic growth while silver has a positive but moderately weak correlation to the same.

Additionally, the persistent repercussions of the Russia-Ukraine conflict, spiralling inflation and the RBI’s recent announcement to hike policy rates again by 50 basis points to curb demand and control inflation may cause a significant risk to the economic growth and keep the commodity market volatile in the near term. These factors among others, may affect the scheme’s performance and the scheme may face intensified volatility in the near term.

Thus, the Edelweiss Gold and Silver ETF Fund of Fund is a high-risk strategy and suitable for experienced investors who understand precious metals or commodities cycles. Ensure you have a high-risk appetite, a long investment horizon to benefit from the future potential of gold and silver and your investment objectives align with the fund.

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Warm Regards,

Mitali Dhoke

Research Analyst

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