Is it time to rethink gold funds?

From 25-30% returns in August-September 2020, gold exchange traded funds (ETFs) are now showing returns of around -7% on a yearly basis. Gold’s performance over the past 18 months could either drive you out of the asset class or prompt you to increase your allocation at lower prices. According to experts, it all depends on whether you see gold as a strategic or strategic asset.

“Gold was in a bull phase even before the onset of Covid-19, which further fueled investment and hedging demand. However, due to supply chain issues, lower physical offtake due to lower jewelery demand and negative investment demand, the market turned bullish this year, resulting in a correction in prices,” said Vikram Dhawan, Head- Commodities and Fund Manager, Nippon India. Mutual Fund said.

However, things may improve for the yellow metal. According to a World Gold Council (WGC) report, holdings in Indian gold ETFs hit their highest level since September 2013, driven by stock market volatility and correction in domestic gold prices. Indian Gold ETFs saw net inflows of $68.3 million during September, taking year-on-year inflows to $433 million.

The WGC report also revealed that Nippon India ETF Gold BeES, India’s largest gold fund, has higher assets. ₹6,000 crore, adding 0.5 tonnes or $31 million worth of gold during September. Despite being in the red in 2021, Nippon India’s Gold ETF, launched in 2007, has delivered returns of over 10% per annum since inception.

Additionally, a recent report by Acute Ratings and Research Ltd showed that India’s gold imports were at a decade high in the first half of FY12, as domestic gold prices recovered marginally by 2.7%. There was an impetus ahead of the peak seen in May. for domestic gold demand. “It is also likely that a portion of the increased household savings in higher income categories is being deployed partly in physical gold because it has traditionally been considered a safe haven in an environment where pandemic risks exist,” What was said. Suman Choudhary, Chief Analytical Officer, Acute.

Another factor which is working in favor of gold is inflation. While the ultra-adjustable monetary and fiscal stimulus measures of the Covid-era helped kick back consumer demand, they have presented a new challenge. According to a recent note by Quantum AMC, the global supply chain, disrupted by the pandemic, has not been able to match the rebound in demand, resulting in rising prices of goods and services.

At the same time, in major developed countries such as the US and UK, fewer people are returning to their jobs after the pandemic, which is driving up wages. Energy prices are also rising as supply offsets the shortfall in demand, increasing the transportation cost of all goods and commodities.

“All this is translating into higher global inflation. Gold prices have historically been in line with inflation,” said Chirag Mehta, senior fund manager at Quantum AMC. According to the WGC, for every 1% increase in inflation from 1990 to 2020, Indian gold demand grew by 2.6%, proving that Indians have used gold to combat high inflation, Mehta believes. The prevalence of these economic risks calls for a 10-15% allocation to gold, which, unlike other mainstream assets, benefits in times of stress and uncertainty, reducing the overall impact on the portfolio. Is .

Experts say that gold is a game of diversification and hedging. Furthermore, based on historical data, gold is either poorly or negatively correlated to risk assets. Preeti Rathi Gupta, Founder, LXME, a financial platform for women, suggests that ideally gold should constitute 5-10% of your portfolio, depending on factors such as age, investment portfolio size, financial goals and investment time horizon. does.

“For a 25-year-old who is just starting his investment journey, gold may not be an attractive investment option as compared to equities for growth and debt for ultra-short to short-term goals. May not be an investment option. On the other hand, at the age of 40, someone with a fairly decent investment portfolio should invest around 5% of their portfolio in gold,” Gupta said.

Like all major asset classes, gold also goes through periods of bullish, bearish and consolidation. Investors looking to invest in gold for the long term or to diversify their portfolios often use volatility to their advantage.

While investment demand has been mixed this year, physical demand is improving and central bank buying has also been stable this year. Besides, higher than expected inflation and the possibility of a sticky may increase investment demand for hard assets and this could benefit gold. While past performance is not a guarantee of future returns, experts agree that gold’s track record is hard to ignore.