Diversifying across different asset classes can lead to overall higher returns in the long run compared to concentrating investments in just one or a few assets. Investors who have spread investments across assets, including gold, have been handsomely rewarded this year.
Data shows that the price of gold broke past the $2,300 per ounce level on April 4, a record high. In India too, the prices of the precious metal have hit an all-time high of Rs 70,248 per 10 grams.
According to Naveen KR, smallcase Manager and Senior Director, Windmill Capital, on a year-to-date basis, gold has been on a strong footing, having risen by around 6 percent as against the broader equity market (Nifty 500) returning around 4 percent.
“The slew of elections lined up in this fiscal year bodes well for gold. The reason is that during times of uncertainties, investors tend to park their money in safer asset classes. As a lot of countries go into elections this year, gold would likely remain in the spotlight. Not to mention, the strong institutional buying that gold has witnessed over the past few years which in turn provides a solid support to this asset class," he said.
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Asset diversification
To gauge how different asset classes have performed over the years Moneycontrol looked at returns delivered by equities, gold, debt and real estate.
For equities, the Nifty 500 Total Return Index was considered, gold returns are measured by the category average return of Gold Exchange-Traded Funds (ETFs) and debt represents the category average return of long duration, medium duration and short duration debt mutual funds. Also, real estate represents returns given by residential properties as per the Reserve Bank of India’s All-India House Price Index.
Over the years, equities have led the list of asset classes that have rewarded investors the most.
For example, in the calendar year 2023, equities gained 27 percent. Compared to this, gold rose 13 percent, debt was up 6.7 percent and residential properties was up 3.8 percent.
Further, data shows that in the years when equity returns were low or negative, gold compensated by putting up a good show.
Risk management
Gold prices globally have been on an uptrend since November 2022 amid moderating US retail inflation numbers and in anticipation of a less aggressive US Federal Reserve.
According to experts, gold is used a tactical allocation in a portfolio. Financial advisors suggest that irrespective of the price levels of gold, an investor should have 5-10 percent allocation to the yellow metal.
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“If the allocation to gold is less, then increase it up to 10 percent. If one is comfortable with long-term horizon, go with sovereign gold bonds (SGBs) only, and if you have liquidity in mind, go with ETFs or mutual fund gold funds, but avoid physical gold,” said Viral Bhatt, Founder, Money Mantra.
Investors strategy
One need not go overboard on gold to get superlative returns. Gold is used as a hedge against volatility in stock markets and uncertainty across the world.
According to Rushabh Desai, Founder, Rupee With Rushabh Investment Services, apart from SGBs, he would not recommend putting additional money in gold at this point.
“Investors should wait for some time as markets are very unpredictable and making decent returns from this point may be difficult. Gold can have a tendency to stagnate for years after decent returns,” Desai said.
In terms of asset allocation, Bhatt suggests that investors can go with 50-60 percent allocation to equities at this point. However, risk-averse investors can lower equities in their portfolio.
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“Fixed income can be 20-40 percent, which could be increased for income needs and lowered if the intent is for growth. Further, real estate can be 10-30 percent, depending on the financial situation and goals. Finally, gold should be 5-10 percent of one’s portfolio. Note that gold investment is for hedging purposes and not a primary investment,” Bhatt said.
Meanwhile, Palka Arora Chopra, Director, Master Capital Services suggests that if an investor has invested in gold purely for gains, then he or she may book partial profits and continue to hold a certain portion to diversify their investment basket to reduce the risk from the volatility hovering over the market.
“But if the investor has invested as a part of a macro strategy to hedge against inflation, then he/she is advised to continue holding it. The investor should assess his/her risk appetite and allocate funds between the assets accordingly to reduce the overall risk of his portfolio as elections are approaching along with many other important events during the year like US elections, fed rate cuts, and geopolitical tension, therefore, high volatility is expected,” Chopra said.
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