Do
not invest too much in Gold
Some
investors never go beyond headlines, claim investment advisors. They cite the
current confusion among gold investors as proof. One set of investors, clearly
scared of screeching headlines announcing all-time high in gold prices, would
like to wait on the sidelines for a correction before investing in the precious
metal.
The
other set, beneficiaries of the dream run the yellow metal has enjoyed in the
past few years, are bombarding their investment advisors with calls to increase
their allocation in gold. "A couple of my clients have sold their longterm
investments in stocks and discontinued all their systematic investment plans in
equity mutual funds because they wanted to invest in gold. I was shocked to
find this when they came for the review of their plan," says a financial
planner, who doesn't want to be named.
"I
tried convincing them that we are investing a small part of the total portfolio
in gold mainly for the purpose of diversification. Sure, it is also a hedge
against inflation and uncertainties in the global and domestic economy, but
that is not an excuse to pull out money from all the other assets and invest in
it," he says.
Clearly,
these investors haven't noticed that gold funds have given only around 13%
returns in the last year, while various equity funds have offered 25% to 50%
returns in the same period. Probably, that wasn't a headline big enough to
catch their attention, says the advisor.
Still
Shining Bright
"We
are still advising our clients to invest in gold, either in goldETF or in the
physical form, depending on their comfort level. This recommendation is purely
from an asset allocation point and we don't have a bullish view or breakeven
point for gold. We believe the prices will remain irm for some time and it makes
sense to invest 5% to 10% of your portfolio in gold," says Amar Ranu,
senior manager, Motilal Oswal Private Wealth Management.
"Of
course, the performance of gold in the current year wasn't that impressive. In
dollar terms, it is somewhere around 8.5%. The weakness of the rupee has helped
it hold steady in the Indian market. Despite Rs 11,000 crore under management
in ETFs, gold is still "under understood" as an asset in India. Most
people are still happy with buying jewellery," says Devendra Nevgi,
founder & principal partner, Delta Global Partners. He says that explains
the confusion among investors over investing in gold at this juncture.
Experts
like him say the confusion will be cleared if investors understand the reasons
behind diversifying into gold. One, your financial advisor is asking you to
invest a small part of your total corpus in gold because he thinks that will
help you spread out your investment across different assets like debt, equity,
gold and so on. This will make sure that your investment is not at the mercy of
the performance of a single asset. For example, when all other asset classes
failed, gold delivered superb returns in 2008 when the world economy was
crumbling.
The
second reason for investing in the yellow metal is to have an effective tool to
hedge against inflation and uncertainties in the economy, like indecisiveness
of the central government, weakness in rupee, firm oil prices and so on.
Lastly,
it is also supported by strong fundamentals. For example, most experts believe
the prices will remain firm because of the robust demand for gold from
consumers and central banks across the world. Also, the uncertainties in the
economy will keep it high for a while, as investors will continue to view it as
safe haven.
Stick
to your plan
"If
you are investing for the first time in gold to diversify your portfolio, there
is no need to wait for a correction in prices. One good or bad year shouldn't
worry you because diversification into gold also lowers the risk of your
portfolio and adds stability to it," says Nevgi.
Ranu
feels that since one is not getting into gold for trading purposes, the current
price levels shouldn't be a cause for concern. However, experts advise
investors against going overboard on the precious metal. "Investors should
limit their exposure to gold to a maximum of 15%. And we are not in favour of
aggressive allocation to gold because we are bullish on equity," says
Ranu.
"This
is not the time to increase your tactical allocation to gold. That opportunity
passed by three years ago. Also, when you are increasing your allocation in
gold, you may be cutting down your investment in some other asset. And if that
asset happens to be equity, it will be a mistake because many things are going
in favour of stocks at the moment," says Nevgi.
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