Gold: As an Asset Class – What is the Role of Gold in your Portfolio?

In India, physical gold is considered wealth & has a significant cultural value attached to it.

But over the years, our definition of wealth accumulation is changing.

It is important to consider where buying Gold stands.

• How important is Gold as an asset class?

• Does Gold hold the same investment value as it used to?

• What role does Gold play in your investment portfolio?

• How much allocation does Gold need to have in your investment portfolio?

Today gold is seen as an investment beyond just buying ornaments or jewellery, the scope has widened.

Nowadays, investors consider investing in gold for 3 primary reasons;

• Portfolio Diversification

• Inverse correlation between equity & gold

• Hedge against inflation

In the modern world, many investment opportunities are available with the click of your mouse.

Does gold lost its sheen or continues to be a strong contender among the other financial & digital assets?

In this article, let us discuss the performance of gold in the long term & compare its returns with Equity Mutual funds.

Table of Contents:

1.) Performance of Gold

2.) Research Methodology

3.) Lump Sum return compared to Gold

4.) SIP return compared to Gold

5.) Is Gold important in your portfolio?

6.) How much Gold do you need to allocate in your Portfolio?

7.) Conclusion

Performance of Gold:

Historically gold has given positive returns in the long term considering both good & bad times.

The price of gold in a short-term period would be in a fluctuating trend all through the years but it has served as a
safe haven for investors.

The following graph indicates that the gold price is in a rising trend in the long run.

Source: gold price.org

Now let us look at an example from the past track record to understand Gold’s volatility better.

Below is an annual return for the calendar year since 1991. In these 30 years, the average return is 9.8%. 

From the record, it is evident Gold has been able to give an Inflation meeting return. 

This is one of the reasons why Investors consider gold to be a safe asset.

However, we need to consider one important question here;

• Has it been able to give an Inflation beating return?

From the same past track record, you can also see that in the past 30 years, It has also given a negative return 7 times.

Even though its price fluctuates, it has been able to deliver a better return in a longer time frame.

Let us look at other factors to determine how better is its return compared to inflation.

The following table depicts the annual return of gold in a particular year since 1991.

First, we looked into the price trend, then the annual return of gold in the calendar year to compare how its returns change year after year.

As an investor, we may need to look into the Compounded Annual Growth Rate (CAGR) for various periods. 

The following is the CAGR for both short- & long-term periods for Gold.

Time period	1 year	2-year	3-year	5-year	10-year	15-year	20-year	Since 1991
CAGR	3.96%	-1.97%	8.00%	10.41%	4.20%	11.37%	11.68%	10.01%

During the last 2-year period, it has given a negative return. 

In the longer time frame, the CAGR is more or less the same.

This can be better understood with the above illustrative graph.

Research Methodology:

All the above figures & graphs show gold return for a particular period or the trend in general. 

Now to have a better understanding, we can assume investing a certain amount in lumpsum or SIP mode in gold. 

So let us process this data for comparison.

Lump sum Return compared to Gold:

Let us assume an investment of Rs. 1 lakh is invested in Gold. 

Similarly, the same amount of Rs. 1 lakh is invested in an equity fund on the same date, to better illustrate the comparison, we have chosen the Kotak Blue-chip fund. 

Let us compare the CAGR for the above investment under various time periods ending on 31st Aug 2022. 

The following table gives you the returns in terms of percentage for Gold & Equity Mutual funds.

Investment	5-years		7-years		10-years		15-years		20-years
	Current value	CAGR	Current value	CAGR	Current value	CAGR	Current value	CAGR	Current value	CAGR
Gold	1,61,285	10.03	1,80,176	8.77	1,45,141	3.8	4,96,247	11.27	7,59,804	10.91
Kotak Blue-chip Gr	1,76,960	12.09	2,28,042	12.49	3,82,742	14.36	4,78,760	11	31,03,734	19.18
NIFTY 100 TRI	1,84,130	12.98	2,46,774	13.76	3,97,316	14.79	4,94,264	11.24	24,22,850	17.68

The 20- year CAGR for gold works out to be 10.91%, which is an inflation-meeting return. 

Comparatively the return on equity mutual fund scheme is on the higher side, which is 19.18%. 

The returns delivered in an equity mutual fund in the same period as gold can be considered inflation-beating returns.

One more important point to be noted here is that there was a dip in returns in the 10-year gold return. 

This shows the volatility of gold. It also demonstrates the risk in gold investments.

SIP Return compared to Gold:

Now let us calculate the figures for a SIP Investment. If someone does a regular investment in gold like the one we do in a mutual fund scheme, then the value of a monthly investment of 10,000 would be as follows.

Years	Investment
	Gold		Kotak Blue-Chip Gr
	Current Value	CAGR	Current Value	CAGR
5 Years	7,47,200	8.99%	8,82,917	15.94%
7 Years	11,51,494	9.06%	13,83,816	14.32%
10 Years	17,71,132	7.67%	24,54,220	13.91%
15 Years	33,61,591	7.95%	50,65,150	12.84%
20 Years	69,43,988	10.11%	1,18,70,520	14.79%

For comparison, a similar amount is invested in an equity mutual fund scheme. Here, SIP helps to achieve the Rupee cost-averaging strategy.

 So, when we analyse the returns of gold under various time periods, it hovers around 7 – 9%.  

Again, as seen in a lump sum investment, the returns are inflation meeting. 

Comparatively in the long run, however, equity mutual fund proves to be a better alternative.

As it can deliver you decent returns ranging from 12% to 15%

This can be considered inflation-beating returns compared to the returns we get by investing in Gold.

Is Gold important in your portfolio?

The data from our above analysis helps us to understand that the gold market in India has witnessed a fall in prices intermittently.

It will not last long as Gold has always proved to give a strong comeback.

The ‘golden question’ here is why one should hold gold in their portfolio.

Let us look at some of the reasons for the question why.

• Gold acts as a safety net for investors at times of financial distress. You can either sell or pledge it in order to use its proceeds.

• Gold is a highly liquid asset. Generally, it takes 2 – 3 business days to encash any other financial assets but that is not the case with gold.

• Unlike stocks, and cryptocurrencies, there is no specialised knowledge required to buy gold. Also tracking the performance of your investments is mandatory in the case of equity-related investment whereas Gold is considered a traditional investment vehicle.

• Indian investors prefer tangible assets to digital assets. Real estate comes in first place in tangible assets and gold comes next in line.

• Due to the inverse correlation between gold & equity, it reduces the risk in your portfolio. Gold reduces the volatility in a portfolio.

• The above figures & graphs clearly depict that the return on gold is definitely an inflation-meeting return.

• Gold is also considered a sign of wealth in India. Indians cherish wearing gold jewellery. Some investors try to accumulate gold over a period just to gift their children with gold jewellery on the occasion of their marriage.

You can invest in gold for safety, liquidity and as an easy asset to stay invested in.

But if you are looking for a way to accumulate wealth, Gold will be of little help in your Investment portfolio as it will not help to create wealth.

You can avoid owning gold for this purpose. 

How much Gold do you need to allocate in your Portfolio? 

Investing in gold can be inevitable for Indians, especially in physical form or paper form. 

There is a plethora of options available to invest in gold including;

• Coins

• Gold ETF

• Gold bond

If you want to hold gold in your portfolio, you can do it so in the form of paper gold (Sovereign Gold Bond). 

Paper gold / Sovereign Gold Bond gives additional benefits like an added interest rate of a small percentage for you, which will increase over time you hold gold.

This will not be the case with physical gold. 

Though the price of gold is volatile in the short run, the return is in an increasing trend in the long run. 

The percentage allocation of gold in your portfolio depends on your financial goals & risk appetite. It would be beneficial only if you plan to hold your investment in gold for the long term. 

Having 5% – 10% of assets in gold will ensure the safety of your portfolio. The range of 5% – 10% might seem larger. 

The reason for that is that in the last segment we pointed out that some may want to hold gold to show off their wealth or present it to their children. 

For those investors, the higher side of allocation will work. An Investor who considers gold as investment diversification can stick to the lower range.

Conclusion:

Gold as an investment is a safe asset but it will not give you any return on regular basis. As a tangible asset, the return will be in the form of capital appreciation. 

So, you can limit investing in gold to 5% – 10% depending on your individual need. 

For investment purposes, as we have seen before paper gold will be a better fit in the long run.

If you are looking for other better investment avenues, you can choose to invest in Equity as; 

• It earns better returns in the long run.

• It is tax efficient.

• It also has a better compounding effect. 

You can pack your portfolio with investments in Equity to generate inflation-beating returns as gold only delivers you returns that meet inflation but not beyond it. 

This Investment strategy will help you to accumulate wealth in the long run.

If you have any comments or questions, write them in the comment box below.

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