Gold Return Climbs Over Five-Year Period Matching Other Equity Categories

The presence of different assets in the portfolio is usually recommended for several reasons, including diversification. A small exposure to gold can play a significant role in the portfolio, though many people do not pay much attention to this area because it might not seem significant.

However, as has been seen repeatedly over the years, gold has managed to hold its own and prove its worth on various fronts. The latest example is how even with a moderate performance over the last one year it is still able to match returns from several categories of equity funds over a longer five-year period.

One of the main factors that gets people to look at gold as an investment in India is the fact that it is able to generate returns over a period of time. Low returns can impact the investors' behaviour as they would not want to lock their money up in an asset where this is too low that does not beat inflation. Gold has an element of safety, confidence, ability for physical use along with returns, which increases its popularity.

A rise or a rally in gold prices often leads to a situation where the returns climb but there is one surprising detail that is being witnessed during the current rally. The price of gold has risen to new highs but a look at the one-year average return of gold funds available with Valueresearchonline.com shows that this is around 13%. As compared to this, the average one-year return for large-cap funds is nearly 42% and for mid-cap funds and small-cap funds is around 57%. This is a huge difference, but when one considers the five-year compounded return, the average return of large-cap funds as well as flexi-cap funds are around 16%, which is similar to that of gold funds.

Mid-cap and small-cap funds have a higher average return of over 22%, which is to be expected considering the massive run-up here. The key point here is that gold has seen consistent returns, and this would have boosted the overall return for portfolios that have an exposure to this precious metal.

The main point as far as the investor is concerned is that they need to look at the factors that are affecting the returns of gold. There are two main factors that are driving the price in India. On one side is the international price of gold that has been hitting new highs and this is definitely leading to the rise in the local prices. Equally important is the fact that the rupee movement also affects the price of gold in India. There has been a consistent depreciation of the rupee and this is the reason that the value of gold has also been rising because the depreciation leads to a situation where the gold price is boosted in rupee terms. Both these factors are working favourably, leading to strong returns on this asset class.

There are a couple of ways in which investors can use the mutual fund route for the purpose of meeting the requirement for the exposure to gold. One is to simply buy a Gold Exchange Traded Fund or a Gold Savings fund. This gives a direct exposure to the price of gold and hence, it can fulfil the requirement.

At the same time, one also needs to look at the exposure in terms of how it will stand in the context of the overall portfolio and this is where a multi asset fund would prove to be useful. It will ensure a limited exposure to gold, along with other asset classes, which will be regulated by the fund manager who will ensure effective rebalancing without the investor having to do this on their own.

Arnav Pandya is founder of Moneyeduschool