Mutual Funds

Gold funds match stock market gains, but will the shine last?

Kumar Shankar Roy |BL Research Bureau | Updated on: Mar 20, 2022

Since mid-Oct 2021 when Indian market peaked, gold – unlike equities – has created wealth

Mutual funds investing in gold, the time-tested portfolio diversifier and safe-haven, haves delivered an average 14.5 per cent return in the past year, almost in step with the 14.8 per cent gains notched up by the equity market benchmark Sensex.

The sprightly returns from gold, older than human civilization, should help investors understand how the so-called ‘idle asset’, apart from weathering financial market storms, can add to their wealth.

The decent and inflation-beating returns by gold funds, including exchange traded funds (ETFs) and fund of funds (FoFs ), in the last 12 months have come without the accompanying volatility that equity investments are infamous for, due to their knee-jerk reactions to sudden events such as Russia-Ukraine war. Gold funds have been are the chartbusters in the last one month with over 3.2 per cent rise in net asset values at a time when equities have struggled. A sharp sell-off in risk assets such as equities, increases the propensity of investors to seek refuge in gold. This time was no different.

Ahead of time

Given the sustained rally in equities for quite some time and ensuing valuation concerns, rising stock prices have made people look at safer avenues. So, gold has been on the radar of smart investors. In calendar 2021, domestic prices of gold may have ended flat, but fund inflows and account additions data show that investors were consistently betting in gold funds.

For instance, in the 12 months ended February 2022, gold ETF folio additions zoomed by 190 per cent year-on-year to 37.75 lakh compared to the entire MF industry’s folio additions growing 28 per cent, albeit on a much higher base. Also, gold ETFs witnessed net inflows of ₹3,000 crore in this period with over 2 lakh folios being added each month.

In fact, from the time Indian markets peaked, in October 2021, the Sensex has corrected 6 per cent. In the same period, gold funds have delivered a good 9.2 per cent positive return. This beats average returns from equity large-cap, flexi -cap and multi-cap funds.

The big trigger for gold prices in 2022 was the geopolitical risk event playing out. But even before the Russia-Ukraine conflict came to the fore, inflationary monetary and fiscal policies, combined with creeping crude oil and commodity prices, were triggering a spike in domestic inflation. Plus, a consistent flight of equity market capital from India and widening current account deficit put pressure on the Indian rupee, which was conducive for domestic gold prices.

Longer term gold fund investors are not complaining either. Gold funds over the last three years have generated over 16 per cent CAGR , beating Sensex’s 15 per cent return in the same period, underlining the importance of having the metal in multi-asset portfolios. If we look at a period, say, five years, gold funds as a category have given 11.3 per cent CAGR , which is not bad although the Sensex has compounded wealth at a faster clip (14.3 per cent CAGR).

Uncertainties remain

However, investors should not overnight turn into gold bulls and go the whole hog on the precious metal. Going forward, three factors can throw a spanner in the works for gold.

First, the Russia-Ukraine war premium is coming off. In the last one week alone, gold funds have seen 2.15 per cent correction at a time when the riskier assets have rediscovered their charm.

Second, the latest US Fed interest rate hike and the ‘dot plot’ of multiple individual interest rate increase projections will mean tightening of financial conditions, which could be fundamentally negative for gold.

Third, in case of gold ETFs , the valuation is based on the prices published by the London Bullion Market Association (LBMA ). The daily LBMA AM (before mid-day) prices are taken by fund-houses and converted into rupee terms after certain adjustments. This makes Indian gold ETF prices vulnerable to unfavourable rupee-dollar movements.

Published on March 19, 2022
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