Akshaya Tritiya 2023: Should you invest in gold and silver fund of funds?

Gold and silver prices

After a volatile year, many investors have reinforced their convictions in owning gold in their portfolios. Silver, the poor man’s gold, is also on the minds of many given the fast and furious moves it has shown in the last few months. Mutual funds are offering products that give exposure to both these precious metals, which can be considered by investors this Akshaya Tritiya.

What is on offer?

There are two schemes available that are investing in a mix of gold and silver - Edelweiss Gold & Silver ETF Fund of Fund (EGS) and Motilal Oswal Gold and Silver ETFs Fund of Funds (MGS). While the EGS has been maintaining an almost equal allocation to both gold and silver, the MGS has started with a 70 percent allocation to gold and the rest to silver. EGS aims to keep rebalancing the allocation to gold and silver each time allocation to one of the metals touches 55 percent, MGS aims to intervene only when allocation to one of the two metals crosses 90 percent, by bringing it back to 90 percent on a quarterly basis.

Does a mixed approach work?

Investing in a mix of gold and silver can work in the long term. When the market is expected to slow down gold is expected to do well on safe-haven demand. In buoyant times, silver does better than gold due to its industrial applications.

Rupesh Bhansali, Head – Mutual Funds, GEPL Capital, says, “Allocation to both gold and silver enhances portfolio diversification. Though gold has beaten silver last year, going forward silver is expected to lead.”

ALSO READ: Looking to invest in gold this Akshaya Tritiya? You can still bank on gold ETFs’ shimmer

When an investor opts to invest in a combo, the portfolio returns may not be the best but the investor takes home better risk-adjusted returns. Over the last one year, gold and silver gave 12.63 percent and 6.31 percent returns, respectively, if we go by the metal prices on the Multi Commodity Exchange of India (MCX). However, if you opted to allocate equally to both the metals a year ago, then you would take home 9.4 percent returns, assuming no rebalancing. Depending on the frequency of the portfolio rebalancing the returns would change.

ALSO READ: Sovereign gold bonds – should you buy them this Akshaya Tritiya 2023?

Niranjan Awasthi, SVP and head, product, marketing and digital business, Edelweiss Asset Management, says, “We aim to address the investors’ dilemma of deciding on the allocation to each of the precious metals by fixing on an equal weight approach. As we rebalance each time any one of these metal allocation touches 55 percent, the rebalancing need is best served in a tax-efficient manner.”

A rule-based approach to rebalancing by the fund manager keeps emotions away. This is very important in a volatile asset class such as commodities. The fast-paced upward and downward movements in gold and silver prices can be unnerving. If the investor decides to rebalance on his own then each sell decision would end up attracting tax. All gains on units of gold and silver ETFs bought on are after April 1, 2023, are taxed at the slab rate, irrespective of the time you have held them. Since mutual funds are pass-through investment vehicles, they need not pay tax on such buying and selling of units.

Should you invest?

Despite the recent fierce upmove in silver, not all are gung-ho about silver as a candidate for retail investors’ portfolios.

ALSO READ: Why MC30 has only 2 tax-saving funds in its basket?

“Silver is more of an industrial metal. From the diversification point of view exposure to gold is required as it reduces the adverse impact of an economic slowdown on the portfolio. Most investors are best served by investing in gold ETF,” says Harshad Chetanwala, co-founder of MyWealthGrowth.com.

But if you are keen on capturing that possible upside in silver or want to further diversify beyond gold, then the ETF route makes a lot of sense to invest in silver, due to the bulky nature of silver compared to gold.

ALSO READ: How many tax saving schemes do you need?

Though precious metals, especially gold, have done better than most other asset classes in the recent past, it is prudent to restrict your exposure to them to around 10 percent of your overall portfolio. Exposure to gold pays off in uncertain times and should be considered as a hedge in volatile markets.

Bhansali prefers EGS as it gives exposure to gold and silver in equal allocation and rebalances to maintain equal allocation.

Both EGS and MGS are yet to complete a year and hence investors need to closely track their performance. Though these are passively managed products, and there is no fund manager risk, the expense ratio needs to be watched out for.