Gold is up 6.2% in the past three months. On the other hand, diversified equity mutual funds have delivered returns ranging from -5.8% (large caps) to -8.9% (small caps). The decline in equity mutual funds began after the 2018 budget and has gathered steam. Debt funds have not provided much relief with three-month returns ranging from 1.6% (liquid funds) to 0.68% (income funds).
None of these figures have been anualized. In other words, if current trends continue, gold will be up 27% for the year and diversified equity funds will be down anywhere between 25% and 40%. Liquid funds will deliver 6.7%. It is probably too early to contemplate such a forecast, but there is such a thing as mean reversion.
This means that the returns in assets revert back to their long term averages over time.
Gold has had a terrible time in the past five years, giving us a return of -0.8% annualized. Equities on the other hand have zoomed ahead with returns ranging from 30.9% to 14.7% on diversified equity funds. But surely mean reversion ought to cover longer periods than just five years?
If you go further back and look at the return the gold has delivered over the decades, you will find an average return of about 11% per annum.
|Year||Gold Price (INR) per 10 gm||Return|
|1968 – 1978||685||15.5%|
|1978 – 1988||3130||16.4%|
|1988 – 1998||4045||2.6%|
|1998 – 2008||12500||11.9%|
|2008 – 2018||31000||9.5%|
|50-year average annual return||11.2%|
Source: Bankbazaar.com; Data as on 19th Jan 2018
Gold recorded fantastic gains in the years immediately following the 2008 financial crisis, leaving very little on the table after 2011. This has caused a long run of low to negative returns for investors who bought the precious metal after that year.
Gold delivered 24.2% in 2009, 23.3% in 2010 and a whopping 31.6% in 2011 before going sharply negative in 2013. This post-2013 bear cycle in gold may be approaching its end. It is also interesting to note that gold has been moving in an opposite direction to equities, providing you with a great hedging option.
How to buy gold
There are several ways to invest in gold
- You can buy units of a gold ETF such as Reliance Goldbees ETF, India’s largest gold exchange-traded fund. You do this on the stock exchange through your broker.
- You can buy units of a mutual fund which in turn invests in a gold ETF. For instance, Reliance Gold Fund invests almost all its money in Reliance Goldbees ETF. You can buy a gold mutual fund even if you do not have a trading and demat account. You will, however, need to complete your mutual fund KYC (Know your Customer).
- You can buy Sovereign Gold Bonds. These are issued by the Government of India with a tenure of 8 years, but track the price of gold. They also pay an interest of 2.5% per annum which virtually no other gold instrument pays.
- You can buy gold online through the Stockholding Corporation of India or through mobile wallets such as Paytm. These companies store the gold with MMTC-PAMP a joint venture between an Indian public sector company and a multinational. You can read this method of buying gold here.
- You can buy physical gold coins or bars from retailers such as Amazon or Flipkart.
- You can visit your friendly neighbourhood jeweller and buy physical gold.
Each of these methods has its pros and cons. However, buying gold through an ETF or mutual funds in our opinion gives you a good combination of low-cost and flexible entry/exit. You can also do a SIP (Systematic Investment Plan) in a gold fund.