Good returns tempt many to increase exposure to the precious metal, but it should be only seen as a tool for diversification, says Madhu T
Some investors never go beyond headlines, claim investment advisors. They cite the current confusion among gold investors as proof. One set of investors, clearly scared of screeching headlines announcing all-time high in gold prices, would like to wait on the sidelines for a correction before investing in the precious metal. The other set, beneficiaries of the dream run the yellow metal has enjoyed in the past few years, are bombarding their investment advisors with calls to increase their allocation in gold.
"A couple of my clients have sold their longterm investments in stocks and discontinued all their systematic investment plans in equity mutual funds because they wanted to invest in gold. I was shocked to find this when they came for the review of their plan," says a financial planner, who doesn't want to be named. "I tried convincing them that we are investing a small part of the total portfolio in gold mainly for the purpose of diversification. Sure, it is also a hedge against inflation and uncertainties in the global and domestic economy, but that is not an excuse to pull out money from all the other assets and invest in it," he says. Clearly, these investors haven't noticed that gold funds have given only around 13% returns in the last year, while various equity funds have offered 25% to 50% returns in the same period. Probably, that wasn't a headline big enough to catch their attention, says the advisor.
STILL SHINING BRIGHT
"We are still advising our clients to invest in gold, either in gold ETF or in the physical form, depending on their comfort level. This recommendation is purely from an asset allocation point and we don't have a bullish view or breakeven point for gold. We believe the prices will remain firm for some time and it makes sense to invest 5% to 10% of your portfolio in gold," says Amar Ranu, senior manager, Motilal Oswal Private Wealth Management. "Of course, the performance of gold in the current year wasn't that impressive. In dollar terms, it is somewhere around 8.5%. The weakness of the rupee has helped it hold steady in the Indian market. Despite . 11,000 crore under management in ETFs, gold is still "under understood" as an asset in India. Most people are still happy with buying jewellery," says Devendra Nevgi, founder & principal partner, Delta Global Partners. He says that explains the confusion among investors over investing in gold at this juncture.
Experts like him say the confusion will be cleared if investors understand the reasons behind diversifying into gold. One, your financial advisor is asking you to invest a small part of your total corpus in gold because he thinks that will help you spread out your investment across different assets like debt, equity, gold and so on. This will make sure that your investment is not at the mercy of the performance of a single asset. For example, when all other asset classes failed, gold delivered superb returns in 2008 when the world economy was crumbling. The second reason for investing in the yellow metal is to have an effective tool to hedge against inflation and uncertainties in the economy, like indecisiveness of the central government, weakness in rupee, firm oil prices and so on. Lastly, it is also supported by strong fundamentals. For example, most experts believe the prices will remain firm because of the robust demand for gold from consumers and central banks across the world. Also, the uncertainties in the economy will keep it high for a while, as investors will continue to view it as safe haven.
STICK TO YOUR PLAN
"If you are investing for the first time in gold to diversify your portfolio, there is no need to wait for a correction in prices. One good or bad year shouldn't worry you because diversification into gold also lowers the risk of your portfolio and adds stability to it," says Nevgi.
Ranu feels that since one is not getting into gold for trading purposes, the current price levels shouldn't be a cause for concern.
However, experts advise investors against going overboard on the precious metal. "Investors should limit their exposure to gold to a maximum of 15%. And we are not in favour of aggressive allocation to gold because we are bullish on equity," says Ranu. "This is not the time to increase your tactical allocation to gold. That opportunity passed by three years ago. Also, when you are increasing your allocation in gold, you may be cutting down your investment in some other asset. And if that asset happens to be equity, it will be a mistake because many things are going in favour of stocks at the moment," says Nevgi. "In fact, investors should use this opportunity to rebalance their portfolio. If their portfolio is skewed towards gold, they should book profits to get back to their original asset allocation plan. Investors should remember that getting in and out of asset classes depending on the prevailing market conditions completely defeats the purpose of asset allocation and diversification."
madhu.tnair@timesgroup.com  |
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