Mutual Funds

Why gold should remain a constant in your asset allocation

Sundeep Sikka | Updated on May 03, 2020 Published on May 03, 2020

The metal hedges the portfolio value from sharp corrections if an asset class sees a rough phase

The mayhem in the equity markets has left all investors anxious.

The BSE Sensex was at its peak not long ago, in January.

In the same period, gold prices gradually moved upwards and gained over 8 per cent in value.

In fact, gold prices reached a new high by April 13.

This is not the first time that gold has bucked the trend. Even in the past, gold has turned out to be an outlier and a storehouse of value in stressful times. During the global financial crisis of 2008, gold prices bottomed out before Dow Jones and saw an appreciation of over 160 per cent in under three years. More recently, the three-year returns on gold stand at upwards of 15 per cent.

All of this information points to one necessity —gold should be a part of a portfolio in the current times when global events have the potential to create havoc in the markets, both equity and debt.

Let us look at how this can be done effectively.

Importance of asset allocation

One fundamental aspect about investing is having appropriate asset allocation. It translates into having investments across different asset classes such as gold, debt and equity.

The idea behind doing so is that different assets perform in different ways in different times, as highlighted above.

Moreover, your asset allocation must be in line with your own risk appetite and financial goals.

Experts usually advise to have a larger exposure to equity than debt for long-term financial goalsand vice-versa for short-term goals.

However, whatever be your risk appetite and irrespective of your financial goals, what should remain constant in your asset allocation is gold.

Seasoned financial advisors recommend an allocation of 5-15 per cent of the total assets to gold.

This essentially hedges your portfolio value from sharp corrections if one of your preferred asset classes witnesses a rough phase, like equity at present.

Why the emphasis on gold?

The first reason has been highlighted above, that gold prices tend to strengthen in the aftermath of a major global crisis.

The other factor is that the gold market is extremely liquid and deep. You will never be in a situation where there are no buyers for the gold you want to sell.

Moreover, this can be done in any part of the world, and even in smaller towns.

At the same time, the historical performance of gold as an asset should also be closely analysed. For instance, a smartphone-sized bar of gold weighing 1.5-2 kg currently costs around ₹1 crore.

The same amount of gold cost just ₹30 lakh about 10 years ago.

The bulk of gold is held by central banks, large funds and high net-worth individuals, thereby significantly reducing the probability of gold prices witnessing a crash due to distress selling.

What should you do?

Take a look at your current asset allocation. If you do not have the required proportion of gold in your assets, you need to rebalance by moving your money from some other instruments to gold. In fact, in the current times, it becomes even more convenient and secure to own gold assets because you do not need to take the physical ownership of the yellow metal at all.

You can invest in gold through gold exchange-traded funds (ETFs) or gold savings funds that are offered by leading and reputed asset management companies.

The online and indirect modes of investing in the traditional yellow metal can also be beneficial if you already have the required amount of gold in your portfolio.

Moving to new-age forms of gold investments such as gold ETFs enhances the security of your assets and makes it easier to liquidate in times of need.

While we all want the Covid-19 crisis to end soon, we should also spare a thought for our financial plans and gains in the years after the crisis ends. Like any other asset class, gold is also susceptible to volatility, bull and bear phases. Accordingly, gradual investment in gold and then holding the same is the strategy one should adopt for long-term gains.

The write is Executive Director and CEO, Nippon India Mutual Fund

Published on May 03, 2020

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