With fears of inflation looming large, experts are recommending taking a tactical entry in the yellow metal at this juncture. Gold is considered as a hedge against inflation and provides diversification to the portfolio. Experts traditionally recommend having 5-15% of one’s portfolio in this asset class.
The yellow metal rewarded handsomely to investors last year as investors rushed to this asset class during the pandemic due to its safe-haven status. As a result, the yellow metal delivered double-digit returns during the pandemic, providing a cushion against equity. From March 2020 till December 2020, Gold Funds delivered in the range of 16% to 19% while equities got battered. In the month of March 2020, Large Cap Funds delivered in the range of -9% to -28%. Similarly, Small Cap Funds had fallen in the range of -11% to -34%.
Gold prices peaked at Rs 57,490 per 10 gram in Mumbai on August 7, 2020, when the nation was under lockdown to contain the spread of the Corona Virus. As economies around the world started coming out of the throes of the pandemic, gold started losing its shine. From its peak, gold price is down 13% as of October 26, 2021.
Gold making a comeback
While equities have delivered mouthwatering returns from the calamitous drop in March 2020, gold is the only asset class that is down 7% over a one-year period as of October 25, 2021. The yellow metal is gaining momentum lately. Over a one-month period, Gold Funds category has delivered 3.80% as of October 25, 2021. Maxie Jose of Affluenz Wealth Advisors says gold should always be an asset allocation call and investors can increase tactical allocation to gold slightly at this juncture.
Mumbai-based mutual fund distributor Rushabh Desai says that investors can stagger their investments in gold over a six-month period. “With gold still trading in the double-digit negative territory since its all-time-high in 2020 and observing the volatility the yellow metal can face due to certain global geopolitical and economical factors, it can be a good buy in a staggered manner over a period of six months. Gold should be considered as a hedge against inflation in the long run and a safe haven asset that can be used during difficult times."
That said, Rushabh says that one should not consider gold as part of their core portfolio as it will behave cyclically. "Depending on the investor's risk profile and portfolio construct an allocation anywhere between 5% to 15% can be considered. Investors should keep a close eye on the US dollar value and yields, troubled sectors in China, updates regarding U.S.-China trade war, concerns over rising covid cases and global economic recovery data including inflation all of which will play an important role in determining the prices and the demand & supply of the yellow metal.”
Savvy investors are moving towards the yellow metal. In the past two months, Gold ETFs have received cumulative inflows worth Rs 469 crore.
Chirag Mehta, Senior Fund Manager- Alternative Investments, Quantum AMC, observes that gold demand has increased in sync with inflation. “As per the World Gold Council, for each 1% increase in inflation from 1990 to 2020, Indian gold demand increased by 2.6%, proving that Indians have used gold to tackle higher inflation. While on the macroeconomic front, things look cheery now - economies opening up, consumer sentiment and spending improving, stock markets rallying - higher inflation, dissipating growth, and potential effects of tapering are risks to the outlook. Higher inflation could hurt consumer demand and slow down the economic recovery. Corporate earnings supported by low factor costs will be under pressure; as interest rates and inflation inch up, which could result in stock market volatility."
Chirag says that gold can be a savior for investors at this juncture due to factors like inflation and expectations of volatility in equity in the days to come as liquidity dries up.
"Drying up cheap liquidity could unveil debt or housing crises which could spill over to the larger economy. Prevalence of these economic risks demands a 10-15% allocation to gold, which, unlike other mainstream assets, tends to benefit during times of stress and uncertainty, cushioning the overall impact on the portfolio,” says Chirag.
Chirag says that gold should not be merely viewed from the context of return. “While returns are a major motivation to invest in gold, one should remember that gold’s utility extends beyond that. It is also a source of liquidity, a portfolio diversifier and an asset that can help combat the effects of higher inflation on a portfolio. Buying gold can thus be a good move for your overall financial well-being. So as tradition demands, go ahead, appreciate gold’s strategic role in your portfolio, take advantage of lower prices, and buy gold this Diwali. Preferably through efficient financial forms like Gold ETFs and Gold Mutual Funds.”
How to buy
Gold FOF/Gold ETF
Investors who do not have demat account can buy Gold Fund of Funds, which invest in Gold ETFs, either from the fund house websites, fintech platforms, MFU or through their distributor. Investors who have demat account can directly buy Gold ETFs from brokerage houses.
Gold ETFs
Gold Funds
Sovereign Gold Bond 2021-22
The Reserve Bank of India has come up with the seventh tranche of Sovereign Gold Bond 2021-22 which opened for subscription on October 25 and closes on October 29, 2021. Do note that these bonds have a lock-in period of five years and the tenor of the scheme is eight years. Investors can trade them on the exchange.
The advantage of Sovereign Gold Bonds is that they offer a fixed 2.50% per annum on the nominal value of the investment and a discount of Rs 50 per gram is offered if bought through online mode. Retail investors can buy a minimum of one gram to a maximum of 4 kg worth of gold. These bonds can be bought from brokerage houses and banks.