BNP Paribas Gold & Income Fund—is it worth investing?

Asset allocation schemes may claim that through one scheme you are able to invest in two or three asset classes. But this will always lead to sub-optimal returns

BNP Paribas Mutual Fund had filed an offer document with the Securities and Exchange Board of India (SEBI) to launch BNP Paribas Gold & Income Fund, an open-ended debt scheme. The objective is to generate income from a portfolio constituted of debt and money market securities, along with investments in Gold Exchange Traded Funds (ETFs).

Should you go for it? Returns from debt cannot keep up with inflation. And while it is a common belief that gold offers good returns over the long-term, this is simply not true. Since 1991, gold is up just 8.9% on a compounded annual basis. That hardly beats a fixed deposit (FD) scheme.

Suppose 65% is invested in debt and 35% in gold. If the debt part gives a maximum return of say 9%, the return from the debt part of the portfolio will be around 5.9%, and if gold goes not go up more than 9% compounded, the overall return would be less than what one can earn through bank FDs. You would also pay a 2% fee to the fund manager, with the only advantage that the return from the scheme may fetch a slightly higher if gold fetches a good return.

We think the fund is merely designed to attract safe money. Since gold prices are rallying, the fund house has decided to add it to the fund. But gold has been rising for years now. To extrapolate that trend into the future would be imprudent. Asset allocation schemes may claim that through one scheme you are able to invest in two or three asset classes. But this will always lead to sub-optimal returns. It's always good to invest in specific products based on your expectations from that particular asset class that is in line with your financial goals.

The scheme will invest 65%-90% in debt and money market instruments. The scheme shall also invest 10%-35% in gold exchange traded funds (ETFs). Debt instruments may include securitised debt up to 60% of the debt net assets.
Exposure to debt derivative instruments not more than 50% of the net assets is only for hedging and portfolio balancing. The scheme will not invest in foreign securities. The scheme will not invest in equity & equity related securities and foreign securitised debt.

Benchmark: CRISIL Short Term Bond Fund Index + Price of Gold (neutral allocation: 75:25).