Gold Linked Debentures... Less Risky and reasonable returns

Gold-linked hybrid products are non-convertible debentures where the rate of interest is linked to spot gold prices. It Helps protect capital and also gains from the upside in equity markets

Recently, gold has caught the fancy of companies. Some broking houses and asset management companies have launched gold-linked debentures. The amount that can be invested is Rs 5 lakh to Rs 5 crore. The product also has a lock-in of three years. This Product is structured for investors willing to take exposure to other asset classes like gold, but with limited risks.

The product functions like this: The fund manager invests 80 per cent of the money in three-year fixed income bonds like government securities or AAA-rated bonds. The rest is used to buy gold options in overseas markets, with regular churning. Typically, fixed income securities give around 20 per cent returns for a period of three years. So, 80 per cent of the amount invested in debt instruments will give 20 per cent returns, protecting your initial investment.

The additional gains come from gold options. Depending on the price at which you invest, real returns on the gold portfolio over three years may range between 30 per cent and 50 per cent or more. As a result, the total return on the hybrid product will be 12-15 per cent per annum.

There are also options where a person can opt for higher exposure to gold. In this case, the capital protection option is diluted to that extent. In the 80-debt, 20-gold options model, the loss, if any, will take place in the gold portfolio. But, the initial investment is protected because of the high debt exposure.

In other Model, some Mutual Funds are planning to launch a product which will invest both in debt-oriented products and gold. The fund house plans to invest a minimum of 65 per cent in fixed-income securities. It will invest a fixed 10 per cent of the amount in gold, which will be increased to a maximum of 35 per cent.

But, remember that such products are meant for portfolio diversification and should not be part of your core portfolio. They are mostly a good hedge against sharp downslide in equities.

This hybrid product is highly in demand due to stock market resistance. Since now silver is more volatile than Gold, Certain financial institutions which develop hybrid structures have been working on a silver-based product and soon we will have Silver Linked debentures in market.