Your Queries: NAV of gold ETF based on gold prices, number of units in ETF

In gold exchange-traded fund (ETF), is the NAV based on the day’s gold prices? Is there any lock-in period in gold ETFs?
—Srikant Kumar

The NAV of gold ETFs as disclosed by mutual funds in based on the prices of the underlying assets and the number of units in the ETF. However, since the gold ETF trades on the exchange throughout the day, its price is dependent on the demand and supply, which may lead to the price deviating from the NAV of the ETF. Gold ETFs do not have any lock-in period. They can be sold on the exchange or directly to the mutual fund. Since the minimum amount for a direct transaction with the mutual fund is high; and hence retail investors are best suited to sell their units on the secondary market platform.

I will need around Rs 50 lakh for my 10-year-old daughter’s higher education. How much should I invest in SIP and should it be a mix of equity and debt?
—Anmol Sain

For portfolio construction, asset allocation-based approach should be followed as it is one of the key determinants of a portfolio’s performance. Depending on your risk profile and time horizon, you may invest in a mix of equity and debt asset classes. Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity which have the potential to deliver considerably higher returns compared to fixed income in the long term. Assuming the education goal is due in another eight years, you may have an allocation of about 65% in equity (large /mid /small /international – 40/6/4/15) and rest 35% into fixed income. The exposure to international equity provides diversification benefits and a hedge against currency depreciation.

The fixed-income allocation can be into fixed-income funds with a high (safer) credit quality portfolio across categories such as banking & PSU debt funds, corporate bond funds, medium to long-duration funds, etc. About one to two years before your goal, shift some exposure out of equity into fixed income. To achieve the education goal of Rs 50 lakh, you would need to invest Rs 37,000 per month as per the recommended asset allocation. Alternatively, you may start with a monthly SIP of Rs 27,000 and increase it annually by 10%. Equity and fixed income are assumed to generate annualised returns of 11% & 7%, respectively.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to [email protected]

Source: Financial Express