Why gold isn't an effective hedge against inflation

In an interview to CNBC-TV18, Sumeet Vaid of Ffreedom Financial Planners shared views on how and why one should adopt asset allocation strategy. He also picked debt funds one can invest into in 2013.

Also Read: Are you planning to be wealthy or poorer Below is the verbatim transcript of Vaid's interview with CNBC-TV18. Q: Traditionally, small investors who have been absent from the equity space have been relying on gold to beat inflation and one has seen the gains that gold has given in the years gone by specifically in 2011, 2012 etc. Now with Reserve Bank of India (RBI) cracking the whip on sale of gold coins and even exchange-traded funds (ETFs) witnessing a sharp correction after the recent fall in gold prices, what can investors bet on as a hedge to their portfolio? A: The importance of this question lies in the behaviour of a retail investor. It is usually seen that the retail investor is not trying to generate real rate of return, which is returns above inflation. Most of the time retail investors or individual investor is interested in achieving some of his goals of life or some of his dreams of life. The number one pertinent goal for which individual investors in India saving for is children education; their objective is over the next seven-ten years they need to provide good education to their children and need to create adequate corpus. However, gold has done very well, in fact lot of them have started buying real estate, which will help them provide for education at the time of that. Therefore, our suggestion is that gold should not be seen as a hedge for inflation because it is a very volatile commodity, especially in the last two years. It is difficult to predict like that. What they need to focus on is asset allocation; asset allocation between equity, fixed income and gold and in an asset allocation strategy it always is a case if one is diversifying among three asset classes at least two of them work, in a current environment equity and fixed income is one asset class, which is looking at giving decent returns over a period of next three-four years. So, our suggestion will be do not look at gold to hedge inflation, look at overall asset allocation to achieve your goals and look at equity, look at fixed income and look at gold in a combination based on duration of gold. _PAGEBREAK_ Caller Q: I can invest Rs 8,000 per months for the next 10-12 years. I am single, 28 years old and a working professional. How should I go about allocating the money? A: You are clear about how much you can save and how long you can save and eight years is a good investment horizon. However, any goal horizon which is beyond six-seven or of eight years, our recommendation will be to invest majority of that money in equity. So, 70-80 percent in equity, 20 percent in fixed income and you can look at 10 percent in gold. It is difficult to predict gold, but 70 percent equity, 20 percent fixed income and 10 percent gold is what our recommendation. Within equity you should diversify between largecap and midcap funds and funds could be of DSP Blackrock family, HDFC family or Birla Sun Life fund family, they have good funds there. On the fixed income side you can look at Birla Sun Life Dynamic Fund, you can look at some of the other short-term fund from DSP Blackrock family and there are ETFs available on gold. It is the asset allocation which we emphasize and the first question which is the most important thing will help you achieve your goal over a period of time and the continuance. Q: What about debt funds. Which are the best debt funds to invest into in 2013 and 2014? A: Our suggestion is to look at dynamic bond fund in which fund manager will allocate the maturity of the product as the interest rate movement up and down is happening because most of the time, at an individual investor level it is difficult to time as should he go into income fund, which is higher on maturity then move out into short-term fund and especially for someone who is going to do a regular investment through systematic investment plan (SIP) route, sometime it is difficult to alter asset allocation very easily, very soon. Therefore, let fund manager take a call on maturity and hence dynamic fund is the best suitable and within that Birla Sun Life Dynamic Bond Fund is doing a good performance over a period of time.