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Gold – Important Asset Class in the portfolio

April 25, 2020 / By fundsPI

Uncertain Time:

Gold is the safe haven in times of uncertainties’, we have heard this phrase so many times earlier but what makes it more relevant now, in the time of Covid-19 pandemic, can be judged from the below highlighted recent headlines;

1. International Monetary Fund(IMF) revises global GDP growth estimate for the year 2020 from 3.3% to contraction of 3% – downward revision of 6.60%. This kind of revision in estimates is not seen since the Great Depression of 1930.

2. Leading global stock markets have been falling with Dow and FTSE recording their biggest quarterly drop in the first three months of the year since 1987. Even Indian equity markets have fallen close to 25%.

3. Brent crude oil prices have gone sub $ 21 levels last seen almost 21 years ago & first time in the history the US oil prices, for that matter any oil, have traded at negative price indicating the complete erosion of demand.

4. Many advanced economies like Canada, France, Germany, Italy, Japan, UK & the US are likely to enter in recession thereby pulling the entire world into recession.

The above-mentioned list can go on with the details of Covid-19 pandemic’s impact on countries, its economies, sectors, loss of job and so on but everything points towards only one factor and that is the heightened uncertainty towards the future.

Why Gold:

So, we all know there exist an asset class named gold. But many of us don’t look at gold from the same investment perspective as we look at other assets such equity, bonds or commodities. Gold as an investment asset class offers many benefits some of which include;

* Asset diversification – it has low or negative correlation with other assets such equities, commodities, bond or real estate

* Source of long-term returns – comparable long-term returns

* Hedge against inflation – the returns have exceeded inflation levels

* Highly liquid – freely traded and yet scarce

Traditionally gold has been used mainly in jewellery but its recent use in electronics, industrial application and demand by central banks has increased the demand for it and its limited above the ground supply ensured the sustained price rise.

Returns from Gold:

Gold not only delivered higher returns during uncertain times but has also given comparable returns during normal times. Gold as an asset class, since it began traded freely in 1971, has delivered the average annual returns of about 10%. Even if we are to compare the returns for different period say last 20 years (at 8.77%) or last 10 years (at 5.20%), returns are good and beats the return from other asset classes such as Saving bank account, Bonds or Commodities. Table below give the yearly gold returns vis-à-vis Sensex (popular equity index) for the last 10 years;

Calendar year returns

Even if we are to look at absolute returns of last 10 year from gold and equity index, there isn’t much of a difference – Lumpsum investment of Rs. 100,000/- in Sensex on 1st Jan 2010 would have turned into Rs. 230,910/- & in same investment in gold would have turned into Rs. 240,000/- on 31st Dec 2019.

In-fact, the return performance from the gold, though not sustainable, stands highlighted in extreme volatile period of equity markets as it beats all other asset by quite a margin. Below graph highlights the equity market & gold performance after the Great Financial crisis;

Gold as a diversifier:

 ‘We should not put all eggs in one basket’ is an old adage and applies to portfolio balancing methodology as well. It has been proven that gold has either very low or negative correlation  with other asset classes such as equity, bonds, commodities or real estate and hence can be used in the portfolio as a diversification tool. So, in volatile market, gains from gold could minimize the losses from other asset classes. To give an example, during Great Financial Crisis in 2008-2009, asset prices across the asset classes such as equity, bonds, real estate had fallen in tandem while gold had delivered return in excess of 27% – right allocation to gold would have certainly reduced the overall portfolio losses and gold as an asset class would have continued to give returns in the recovery phase of the market as well.

Gold Allocation:

As can be seen from the gold return performance charts, gold as an asset class not only delivers much higher returns in uncertain times but also gives consistent returns over longer period of time. This along with other mentioned points gives us a very strong reason to make gold as one of the asset class in the investment portfolio. But what percentage of total portfolio should be allocated to gold depends on lot of factors such as risk profile, investment horizon, weightage of other asset classes, investment object and many other factors. But as gold act as a hedge against the other classes, allocation of anywhere between 5%  to 15% would be an ideal portfolio allocation – this should include the jewllery and other gold assets.

Physical or digitized Gold:

Buying and holding gold in physical form has its limitation and can be summarized as below;

* Investment Size – need to buy minimum 1gm

* Storage – need to store in locker or safe place

* Liquidity – need to be sold to Jeweller

* Price difference – Jeweller’s price in the shop and not the index traded price

* Trading – Cannot trade easily as limited buyers in the physical market

Investing in gold through digitized mode removes all the above limitations as digitized gold can be traded in the same way as stock are traded on the exchanges. Many mutual fund companies in India offer Gold funds to retail investor to invest in gold.

Gold Funds Performance:

Although there are many gold funds in Indian market today, below are the gold fund offerings along with their return performance by top mutual fund companies;

How to Invest in Gold Funds:

Detailed performance of all gold funds offered by mutual fund companies in India can be checked on ‘fundsPi’ app (on Google Play) or is also available on . One can choose to invest in completely digitized manner through fundsPi app or website.

Categories: Mutual Fund, Investment

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