Is This A Good Time To Invest In Gold Mutual Funds?

June 2020

3 min read

 

During the Corona Virus pandemic, while equity and debt markets were going through a volatile phase; one asset class was shining through. And that was Gold. Over the last 6 months, Gold Mutual Funds have given a return of about 23%; and over last year, this return was a little more than 38%. Naturally, Gold as an asset class looks more attractive to most investors looking at the past returns.

But after the phenomenal performance over last year, will the gold continue to give these returns? Is this the right time to invest in Gold Mutual Funds? While, we believe that, Gold is an important part of the portfolio; what should be the maximum exposure of gold in your portfolio? We will address all these concerns in this blog.

First Off, Let’s Understand What Factors Drive The Movement Of Gold

Similar to any asset class, the prices of gold are driven by consumer demand. Especially in India, Gold is always looked at as a safe investment and it is preferred over other investment vehicles. There are also various reasons for the rise in Gold Demand.

Gold is said to have a negative correlation with Equities. That means when the Equity market goes down due to economic slowdown or as in the current situation due to a global pandemic; Investors invest in gold as they want more safety. This is relatable in the current market situation because the spread of the Corona Virus across the globe and worldwide lockdown had a serious impact on the world economy. Due to this, most investors exited equity and entered gold to protect the downside of their portfolio.

Gold also has an inverse relationship with the dollar. If the value of the dollar weakens, then the gold price goes up and vice versa. The gold prices are denominated in the dollar internationally, hence any weakness in the dollar increases the value of other currencies. So, the demand for gold goes up, leading to an increase in gold prices.

The reason for the recent increase in gold demand lies in the COVID – 19 pandemic. Since the end of December 2019, the Corona Virus crisis has affected the entire world. The uncertainty around it has led to volatility in capital markets. During this uncertainty, the institutional investors turned to gold in search of a safe haven. But for how long will this last?

How Gold Mutual Funds Have Performed In The Past?

If we look at returns as on date, then the short term returns of Gold Mutual Funds have been very impressive. Here’s a snapshot of the performance:

These returns surely look attractive enough for most investors and looking at these the interest in Gold Funds has gone up. But about a year back, returns of gold mutual funds were not very attractive. Here are the returns of the same funds over different time frames but as on 28th June 2019.

These are the returns of the same gold funds just a year back. Clearly, Gold only does well, when every other asset class is struggling. And if you plan to invest in Gold funds with a return expectation based on the first table then that would be a mistake.

So, Is Now A Good Time To Invest In Gold Mutual Funds?

Gold acts as a hedge in your portfolio during volatile times. However, it cannot be part of your core portfolio. So, What is a Core Portfolio? A core portfolio is basically a part of your portfolio that is meant for your long term and short term financial goals. For these goals, you should invest in equity and debt funds based on your risk appetite.

You can invest in gold funds to hedge the risk in the portfolio but do not expect the returns they have given in the last year. Ideally, you should limit the overall gold exposure to 10-15% of the portfolio. Gold Funds may give marginal returns over long periods of time when the overall economy is doing well. The reason behind investing in Gold is to protect the portfolio from extreme downfall during equity market volatility. Hence, invest with this objective so that you will not be disappointed with the returns.

Looking for options to invest in gold other than mutual funds? Check our blog on Paper / Digital Gold to get more details.