Despite short-term blips, gold price has been on the rise since October 2022. The yellow metal has delivered a staggering return of 33 percent over the last one year in rupee terms, far outperforming the Nifty 50. The broader equity market index could gain only 27 percent.
Gold mutual funds allow you to invest in a staggered way, a route that most experts recommend these days, given the rise in gold prices amidst the already ongoing Middle-East conflict.
Shining over long run
Gold is used as a hedge against stock market volatility and uncertainties. Satish Dondapati, Vice-President & Fund Manager, Kotak Mahindra AMC, says: “The recent surge in gold prices was also mainly due to the expected US interest rate cut”.
Also, gold buying by central banks, especially of Russia and China, and the rising geopolitical tension during the year have inflated gold prices, adds Dondapati.
Most experts agree that gold should be a part of your long-term asset allocation plan.
Like equities, gold has delivered a stable return, if you continue to hold for the long term. A Moneycontrol analysis of 5-year, 10-year and 15-year rolling returns calculated from the last 40 years’ gold price data shows that long-term investments showed slower volatility than short- term investments (see graph), which showed stable return in most time frames.
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However, gold is not meant to maximise wealth, warn experts. Financial advisors suggest that irrespective of the price levels of gold, an investor should have 5-10 percent allocation to the yellow metal at any point in time.
See here: 30 Sovereign Gold Bonds coming up for premature redemption: Should you surrender or hold units?
Gold funds can be a better option for small investors for its liquidity and ease of investing, particularly, if you wish to invest in a staggered way over the long term.
What are gold funds?
Gold funds invest predominantly in gold exchange-traded funds (ETFs), which, in turn, invest in the physical gold of 99.5 percent or higher purity. A gold fund’s net asset value (NAV) is linked to the gold price in the local market.
Currently, there are 13 gold funds available with collective assets under management (AUM) of over Rs 11,451 crore. There are two other funds that invest in both gold and silver. These gold funds invest in their own gold ETFs. Since they are passively managed, the returns are close to those of the gold ETFs.
Read here: Why are Sovereign Gold Bonds trading at 5-12% premium?
Apart from the operational structure, there is not much difference between gold ETFs and gold FoFs (fund of funds). However, it’s easier to buy/sell gold FoF at the prevailing NAV at any time.
Gold funds enable SIP
Unlike Sovereign Gold Bonds and gold ETFs, gold mutual funds allow systematic investment plan (SIP). You can start your SIP in a gold fund with as little as Rs 500 a month.
See here: Gold ETFs get budget boost: Should you invest?
SIP in gold funds reward investors well. For instance, a monthly SIP of Rs 10,000 in the gold funds category in the last 10 years (total investment of Rs 12 lakh) would have grown to Rs 22.5 lakh.
Is it the right time to invest in gold?
While the yellow metal has yielded excellent returns in recent years, it has also seen the highest levels of volatility in the past.
Also see: Will customs duty cut hurt investors in sovereign gold bonds maturing in 2024?
Rushabh Desai, Founder of Rupee With Rushabh Investment Services, cautions. “While gold is not very volatile, it can be cyclical, meaning it can experience periods of no returns or stagnation”.
When asked about current recommendations, Rushabh advises against buying physical gold or gold ETFs due to the high prices. He suggests considering sovereign gold bonds (from secondary market), which offer a fixed interest rate of 2.5 percent and are tax-efficient, as a potential investment option.
Dondapati also cautions that given the current market conditions, investors should carefully consider their options. Also, gold prices are near their all-time high and any market volatility could affect short-term price movements.
For small investors, SIP in gold funds can help ride out the volatility in gold prices without taking on the risk of bad timing.
Consider investing via the SIP route if the value of gold assets in your portfolio is less than 10 percent of the whole portfolio. But go slow in taking fresh positions, if you are already invested up to, say, 10-15 percent of your entite portfolio in gold.
Also see: Gold rewards investors. But don’t go overboard, it’s just an asset allocator