Should you sell equities and buy gold instead?

A fall in stock prices makes many investors nervous, especially those who have started investing in the recent past. At the same time, gold prices are going up. As gold goes above the psychological mark of $2,000 per ounce in the international market, there is an expectation that the price of gold will continue rising. Should that make an investor consider gold over stocks?

Equities vs gold

Though it’s common for new investors to compare asset classes and go for the one that has given the highest returns, experts say this is unwise. It is not stocks or gold, rather it is stocks and gold, along with other asset classes, that will help you invest better and make consistent returns.

These two asset classes serve two different purposes. While equities bring in much needed growth – high returns (more than the rate of inflation) to the portfolio in the long term, gold acts as a hedge in times of uncertainty.

Due to the Russia-Ukraine war, the global supply of oil and gas is expected to go down with sanctions against Russia and oil prices consequently went up. The uncertainty also pushed some investors to buy gold and pushed up gold prices.

India imports both crude oil and gold, and paying higher prices for both means a higher current account deficit. This has pushed the rupee down against the greenback and raised bond yields. Stocks are also under pressure due to expectations of sticky inflation and slower economic growth.

The glitter of gold

For an Indian investor, holding gold in one’s own portfolio makes a lot of sense when there is an expectation of sticky inflation and rupee weakness against the dollar. Though this may play out in India for some time and gold may remain in demand, investors have to be measured in their action.

“Though gold prices may go up further, the best time to buy gold was six months ago. Now, allocations to gold should be in line with asset allocation needs. Aggressively chasing gold for returns is best avoided,” says Shyam Sekhar, Chief Ideator, ithought Advisory.

Just because gold prices have risen in the recent past, do not take that to mean prices will keep moving up. Rahul Kalantri, Vice President, Commodities, Mehta Equities, expects some correction in gold prices after a rally over the last few days, which should act as a good entry point for investors.

“We are expecting gold to outperform even after the war settles as due to the after-effects of war, the world would see some sort of recession zone where gold would be the preferred asset. If this stands true we can see gold trading at $2,150-2,220 levels. In the domestic market it could be more favourable due to rupee weakness against the dollar; a close above Rs 54,200 could see Rs 55,050 & Rs 56,350 per 10 gram,” he says.

Stocks are volatile

Investments in direct stocks can be very painful if you have chosen stocks without caring about their fundamentals. Stocks with poor fundamentals or loss-making underlying businesses tend to get hammered out of shape when there is large-scale selling. Institutional investors shift to quality businesses with attractive valuations by dumping overvalued stocks. That makes it tough for stocks with underlying poor businesses.

Vikas Gupta, Founder and Chief Strategist - Omniscience Capital, says: “If you are worried about volatility in the stock market, then sell stocks held by you that enjoy high valuations and allocate that money to gold or other better valued stocks. But do not exit stocks completely.”

If you have bought some thematic mutual fund scheme looking at past returns without giving due thought to the investment logic, talk to your financial advisor and see if you can sell. Try moving to a diversified equity fund. Reducing exposure to stocks may help you if you do not have as much risk taking capacity. But, do not sell equities arbitrarily, just because markets are volatile.

What should you do now?

There is no one winning asset class. The winners will keep rotating and hence a diversified approach works. Experts see an opportunity for equity investors, amid the volatility. Says Sekhar: “This is the time to build long-term equity portfolios. Exit weak stocks in your portfolio and instead buy stocks of industry leaders as they are more likely to handle the inflationary scenario ahead in a better manner.”

“Some stocks turn attractive as stock prices come down and this can be a good time to invest in select stocks for the long-term,” says Gupta. He advises deploying cash over the next three months in equities. Systematic investment plans can make it easy to take staggered exposure to gold and stocks.

Though the experts’ call to allocate money to stocks looks good, it is difficult to implement and not all have nerves of steel. Rupesh Bhansali, Head-Mutual Funds, GEPL Capital, sees investors chasing stocks in search of returns as the chief cause of worry when correction sets in. “Investing in line with your asset allocation in stocks, bonds and gold should help you achieve your financial goals over a period of time with less anxiety,” he says.

If you have been rebalancing your portfolio from time to time, then you may have booked some profit last year when the stock markets were going up. If you see your portfolio digressing too far from the desired asset allocation, then you can take some corrective action – by selling some gold or bonds and buying equities.

Bhansali recommends investments in large-cap equity funds. When the markets recover, a frontline large-cap index such as the Nifty 50 and large-cap stocks tend to recover first. Small and midcap stocks may take some time. Even if you are keen to invest in small and mid-caps stocks, you may be better off taking the mutual fund route and that, too, through a systematic investment plan, which helps reduce timing risk.