Gold's comeback in portfolios

Despite having run up substantially in the past year, recent events like Brexit can lead to further gains

Gold up 6.7% in Jan on renewed prospect as safe asset

While the BSE Sensex has been taking a serious hit because of global uncertainties, gold has quietly made a comeback, in terms of returns. In the past year, when the Sensex fell 5.1 per cent, gold funds returned as much as 17-18 per cent.  On Friday, when the British population voted to exit the European Union, popularly known as Brexit, investors rushed to the yellow metal’s safe haven, leading to a four-per-cent surge to Rs 30,755 per 10 grammes.

No wonder, fund managers are busy fielding calls from potential investors who want to invest in gold. “We have got some enquiries from investors after the recent increase in gold prices. But our advice is not to invest in it as an immediate reaction to the fall in markets. Ideally, gold should just be five-10 per cent of your portfolio,” says Anjaneya Gautam, national head-Mutual Funds, Bajaj Capital.

But given the uncertain times, many investors would seek the yellow metal more aggressively for two reasons: its price is expected to appreciate in dollar terms. This, coupled with gains from any rupee fall, may give higher returns. The metal also serves as a hedge against inflation. Though inflation has come off the heady eight-10 per cent a couple of years ago, it is beginning to rear its head again. The Consumer Price Index was up 5.76 per cent in May, up from 5.39 per cent in April. Many advisors, as a result, are calling for a higher allocation. Dinesh Rohira, founder and chief executive officer, 5nance.com, says: “Gold was in a bull phase for 10 years till 2012. It corrected over the last three-four years. It is expected to do well now. Even earlier we were advising 10 per cent of investment in gold. Now, we are telling investors to increase it to 20-25 per cent,’’ he says, adding that investors should stay put for two-three years for a good upside.

For investors looking to buy the yellow metal, there are three options: gold exchange-traded funds (for those who have a demat account), gold funds which will invest in gold-exchange traded funds of their own fund house (for ones who do not have a demat account) and one gold mining fund – DSP Blackrock World Gold Mining Fund. The last two are feeder funds that invest in other mutual fund exchange-traded funds or schemes that buy gold mining companies’ stocks. “Investors must keep track of cost because some of the funds may have high expense ratio, especially if they are fund of funds,’’ says Feroze Azeez, deputy CEO, Anand Rathi Private Wealth.

Investment advisors say between gold funds and ETFs, the former are better as there is an option to invest smaller amounts through Systematic Investment Plans (SIPs). As against this, if you are investing in ETFs, you will have to invest a minimum of Rs 3,000 as you will have to buy one unit or gramme. Another disadvantage of ETFs is that investors need demat accounts to invest in them and they have to sell directly on exchanges. In comparison, investing in gold funds is more convenient.

Sovereign gold bonds are also an option that investors can look at. These will give capital appreciation as well as income, adds Azeez. However, as there is no ongoing tranche now, you will have buy it from the secondary market.