Gold wins the 2011 returns chase; beats all asset classes

Those who bet on gold funds at the start of 2011 would have every reason to pat themselves on their backs for the good fortune.

In the race between different asset classes in 2011, gold funds won hands down, with domestic investors in them pocketing a 32 per cent return.

Among the investment options, equity fared the worst, with diversified funds losing 22 per cent in value. Debt options such as fixed deposits and short-term debt funds took the middle path, returning 8.5-9 per cent.

Diversifying your portfolio to include real estate or agri-commodities would have delivered a healthy gain too.

Equities sink

The year 2011 was a painful one for equity investors, with the BSE Sensex losing 24 per cent (as on December 17). Diversified equity funds contained losses better than the index, but still saw an average erosion of 22 per cent in value. The one class of equity funds that did well, FMCG sector funds, delivered a respectable 13 per cent return.

Within debt options, mutual funds investing in short-term debt delivered the best 9 per cent return. They were able to maximise gains by locking into certificates of deposit or corporate paper yielding 9-10 per cent during the first half of the year.

Long term debt funds averaged 8 per cent. If you invested in January, one-three year bank deposits yielded 8-8.5 per cent, though rates later rose to 10 per cent.

the top dog

It was, however, gold that proved to be the top dog among asset classes in 2011. Investors in gold exchange traded funds made a handsome 32 per cent gain. More than half of these returns came from the weakening value of the rupee against the dollar, which boosted domestic gold prices.

Global gold prices, which have dipped recently, closed the year with a 15 per cent gain in dollar terms.

Real estate prices too were on an upswing across the country. Residential property prices as measured by Residex (Source: National Housing Board) were up 20-25 per cent in the metro cities between January and September (the latest available data).

While industrial commodities did not do too well, agri-commodities were another offbeat choice that would have paid off this year. NCDEX Dhaanya — an index representing the ten most liquid agri-futures contracts in NCDEX — appreciated 30 per cent in the last one year.

What's ahead?

So, given that 2011 was a year full of surprises, which assets should investors bet on for 2012?

Quite a few fund managers and brokers predict a classic ‘reversion to mean', where gold may take a back seat while assets such as equities may stage a revival.

Institutional brokers and asset managers take the view that domestic demand will protect India from the global slowdown in 2012, leading to a bottoming out of corporate profits and stock markets in the early part of 2012.

In debt, the consensus seems to be that short-term funds may not repeat their 2011 performance.

With interest rates likely to fall, investors should look instead at long term funds, especially gilt funds that can gain from rate cuts. Mr Vishal Kapoor, Head Wealth Management, Standard Chartered Bank, adds a couple of offbeat asset classes to the above choices. “One theme we like is international equities.

“In markets such as China and north-east Asia, valuations, after correction, look attractive, though they can only be diversifiers to your Indian equity holding.”

If you retain your belief in gold, he also suggests buying gold mining stocks (available via mutual funds).

“We think gold equities are a good opportunity. Traditionally, gold equity has a high correlation with gold prices.

“They have the additional benefit of operating leverage. Gold equities have not caught up with gold commodities and we see no reason why they will not catch up.”

>craji@thehindu.co.in

>akrishnan@thehindu.co.in

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