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

by Holistic Leave a Comment | Filed Under: Asset Allocation, Gold-Investment

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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.

Or are you interested in creating a Comprehensive Financial Plan for your financial goals?

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Jey S
Jey S
24. September, 2021.
I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
aksaswadkar
aksaswadkar
24. September, 2021.
I was about to retire and really not understanding how to invest money to have financial freedom and fulfilling my goals. Was desperately searching on internet way out and fortunately came across Holistic Investment Planners. I read number of articles on their website and realized that this is the agency which I want and engaged their services for my retirement planning. It is an excellent experience to be associated with Holistic. Right from day one our interaction was fantastic and they gave me such a wonderful plan that I had never imagined. I am fortunate enough to be in the client list of Holistic. I have recommended Holistic to my friends as well.
Lionel Faber
Lionel Faber
16. September, 2021.
I've been availing their services for the past year. They are highly knowledgeable in the field and are very patient with all doubts and queries. Personalized financial planning is provided keeping your short term, medium term and long term goals in mind. They do not pressurize you to purchase schemes of their choice. They provide their input and suggestions and leave the decision up to you which shows their honesty and high principle.
Sridhar
Sridhar
8. September, 2021.
Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
Nitesh Agrawal
Nitesh Agrawal
6. September, 2021.
I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
Swetha Vasanth
Swetha Vasanth
6. September, 2021.
This is my first year service with the Holistic Team and I would say that they are very much helpful in creating a financial plan and follow ups during the year. I would definitely suggest them if anyone who is willing to proceed with their savings professionally.
Joseph Mathias
Joseph Mathias
6. September, 2021.
I came to know about Holistic Investment Planners online while searching for different investment ideas. Once I contacted them the journey was very smooth. Mr. Ramalingam explained all the aspects of Financial planning in detail and it opened my mind. I realized how important it is to have a Financial planning. Mr. Rajan suggested all the requirements as per my goals and made a Investment plan keeping in mind of my goals. I started my Investment journey with them. I wish I had done it some years back then it would have been in a different level. Review meetings were held every six month to check the implementation of the plan and check the results as per the requirements and to check if any changes required. Overall it was a good experience with Holistic Investment team and would like to continue in the years to come.
Srinvas Kannan
Srinvas Kannan
30. July, 2021.
I came across Holistic investment planners almost 5-6 years back, but I did not have the trust since I had met a few of them who did not sound promising. Then I started investing through a financial advisor of my friend. After 4 years of investing the returns were very low. I was disappointed and started looking for financial advisors when I came across Holistic investment. I had a detailed discussion about my goals and the way they would approach achieving my goal before deciding to switch my investments to them. After a thorough analysis of my then existing portfolios, they suggested new ones and we zeroed-in on 6 schemes/funds where our investment would be split. I am glad I made the decision of switching over and taking Holistic planner's advise, my returns are handsome and I only wish I could have taken their help/advise 5 years back itself. Neverthless, I would like to recommend their services for investment and financial advise if someone is serious about their investments.
Shivaram Andiappan Selvaraj
Shivaram Andiappan Selvaraj
3. July, 2021.
I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
Nellai B
Nellai B
26. June, 2021.
I have been associated with them for the past three years. They are very professional and polite in answering all our questions. I have complete trust in their suggestions. I strongly recommend for anyone. I am looking forward to have strong and successful association with them.
Google rating score: 4.4 of 5,
based on 61 reviews

Google Reviews

Jey S
Jey S
24. September, 2021.
I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
aksaswadkar
aksaswadkar
24. September, 2021.
I was about to retire and really not understanding how to invest money to have financial freedom and fulfilling my goals. Was desperately searching on internet way out and fortunately came across Holistic Investment Planners. I read number of articles on their website and realized that this is the agency which I want and engaged their services for my retirement planning. It is an excellent experience to be associated with Holistic. Right from day one our interaction was fantastic and they gave me such a wonderful plan that I had never imagined. I am fortunate enough to be in the client list of Holistic. I have recommended Holistic to my friends as well.
Lionel Faber
Lionel Faber
16. September, 2021.
I've been availing their services for the past year. They are highly knowledgeable in the field and are very patient with all doubts and queries. Personalized financial planning is provided keeping your short term, medium term and long term goals in mind. They do not pressurize you to purchase schemes of their choice. They provide their input and suggestions and leave the decision up to you which shows their honesty and high principle.
Sridhar
Sridhar
8. September, 2021.
Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
Nitesh Agrawal
Nitesh Agrawal
6. September, 2021.
I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
Swetha Vasanth
Swetha Vasanth
6. September, 2021.
This is my first year service with the Holistic Team and I would say that they are very much helpful in creating a financial plan and follow ups during the year. I would definitely suggest them if anyone who is willing to proceed with their savings professionally.
Joseph Mathias
Joseph Mathias
6. September, 2021.
I came to know about Holistic Investment Planners online while searching for different investment ideas. Once I contacted them the journey was very smooth. Mr. Ramalingam explained all the aspects of Financial planning in detail and it opened my mind. I realized how important it is to have a Financial planning. Mr. Rajan suggested all the requirements as per my goals and made a Investment plan keeping in mind of my goals. I started my Investment journey with them. I wish I had done it some years back then it would have been in a different level. Review meetings were held every six month to check the implementation of the plan and check the results as per the requirements and to check if any changes required. Overall it was a good experience with Holistic Investment team and would like to continue in the years to come.
Srinvas Kannan
Srinvas Kannan
30. July, 2021.
I came across Holistic investment planners almost 5-6 years back, but I did not have the trust since I had met a few of them who did not sound promising. Then I started investing through a financial advisor of my friend. After 4 years of investing the returns were very low. I was disappointed and started looking for financial advisors when I came across Holistic investment. I had a detailed discussion about my goals and the way they would approach achieving my goal before deciding to switch my investments to them. After a thorough analysis of my then existing portfolios, they suggested new ones and we zeroed-in on 6 schemes/funds where our investment would be split. I am glad I made the decision of switching over and taking Holistic planner's advise, my returns are handsome and I only wish I could have taken their help/advise 5 years back itself. Neverthless, I would like to recommend their services for investment and financial advise if someone is serious about their investments.
Shivaram Andiappan Selvaraj
Shivaram Andiappan Selvaraj
3. July, 2021.
I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
Nellai B
Nellai B
26. June, 2021.
I have been associated with them for the past three years. They are very professional and polite in answering all our questions. I have complete trust in their suggestions. I strongly recommend for anyone. I am looking forward to have strong and successful association with them.
Google rating score: 4.4 of 5,
based on 61 reviews

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