With average 1-year return of 16.2%, gold funds are best performers in last 12 months, but for how long?

A large portion of the 12-month returns have come in the last 6 months with Invesco India Gold Exchange Traded Fund, IDBI Gold Exchange Traded Fund, and 9 others delivering at least 9%

Kumar Shankar Roy Jul 30, 2019

Gold ETFsEquity advocates have faced a trying time in the last 12 months. On the other hand, gold bugs feel justified in their attraction towards gold. In the mutual fund space, the story is quite similar since the nature of the asset is reflected in the fund NAV movements. If you ignore gilt funds, gold funds are the best performers across mutual fund categories. The average 1-year return stands at 16.2%. From the equity fund side, the best performers are the banking sector funds with 1-year average return of 2.2%. This wide gap between gold fund returns and equity fund returns is stark. However, investors have the habit of chasing returns. Should you invest in gold now? Or, wait for the so-called imminent turnaround in equities?

Juicy gold returns

The common refrain in the investing world has always been that gold is a ‘dead’ asset. But if you look at last 12 month returns, gold funds have been anything but dead. The years 2013 and 2015 were bad for gold fund fans. Gold funds in 2013 lost between 6-14%. In 2015, gold funds lost between 5-15%. But, otherwise, gold funds haven’t been wealth destructors. In 2016, gold funds gave between 8-21%. 2017 was a quiet year, with marginal returns. In 2018, gold returns were in a narrow range of 5-8%. The last 12 months have been great. A gargantuan portion of those 12-month returns have come in the last 6 months, with Invesco India Gold Exchange Traded Fund, IDBI Gold Exchange Traded Fund, Kotak Gold ETF Fund, ICICI Prudential Gold Exchange Traded Fund and 7 others delivering at least 9%!

Gold fund returns 

Top gold funds 1Y (%) 3Y (%) 5Y (%) AUM(in cr.)
IDBI Gold Exchange Traded Fund 18.63 3.39 4.19 64.56
UTI GOLD Exchange Traded Fund 18.53 3.09 3.91 470.09
Invesco India Gold Exchange Traded Fund 18.48 2.94 3.66 32.34
KOTAK GOLD ETF 18.43 2.86 3.79 378.73
ABSL Gold ETF 18.33 2.88 3.82 82.16
SBI-ETF Gold 18.29 2.78 3.78 653.21
Quantum Gold Fund 18.26 2.84 3.78 57.62
Reliance ETF Gold BeES 18.26 2.88 3.9 2,428.28
HDFC Gold Exchange Traded Fund 18.21 3.2 3.95 470.45
Axis Gold ETF 18.17 2.01 3.26 114.26
Source: RupeeIQ Fund Explorer

Equity funds, on the other hand, mirror the depressing gloom around. Small equity cap funds are down 12% on an average in the last 12 months. Mid cap equity funds are down an average 9% odd. Themes like MNC, Consumption, Dividend Yield, Energy have not worked, neither have niche strategies like value investing.

If these trends persist, should you go long on gold? This is the moot question. Gold is a classic hedge (doing very well when the world is in crisis) and in good times, demand can perk up – and in addition, we now have dollar weakness staring us in the face and which may spur rallies in the precious metal with the slightest hint of the US economy slowing down.

“Indifference toward gold is starting to fade and the metal has been reasserting itself as an asset of choice amidst escalating trade and geopolitical tensions. In a world where many competing assets such as government bonds are offering negative rates and the yield curve is pointing to a recession, gold is looking like a good investment. Gold will remain a highly relevant portfolio diversifier amid increasing uncertainties around global growth,” says Chirag Mehta, Sr. Fund Manager-Alternative Investments, Quantum MF.

According to the Attitude Survey conducted by Knight Frank, 14% of Indian ultra-high networth individuals (UHNWIs) are likely to increase their investment to Gold asset class in 2019, 3% higher compared to the year 2018. Globally, 20% of survey respondents said that they are going to increase allocation to Gold in 2019, a higher percentage when compared with 11% citing to have increased allocation in 2018. The positive attitude of UHNWIs towards investments in the asset class has also gone up in Asia with 25% expecting an increase when compared to 19% who cited an increase in allocation in 2019. Knight Frank conducted the survey to map the investment sentiment of UHNWIs towards Gold as an asset class in 2019.

Gold bond option

The choices then, for anyone who wishes to invest in gold for the next 5-8 years, are many – physical gold (but storage and conversion costs), gold jewellery (but premium, making charges and purity), Gold ETFs (but no government guarantees or fixed returns plus management charges) and RBI Sovereign Gold Bonds. The next issue of gold bonds is around the corner – August 5, 2019.

“What if you could earn “dividends” while you wait for $1800 and have no issues of pricing, storage or transparency and no capital gains to pay? That’s where Sovereign Gold Bonds score over all the options! Gold bonds also pay interest at the rate of 2.50% per annum on the amount of initial investment,” say Sandip Raichura – CEO of Retail and Distribution, Prabhudas Lilladher.

RupeeIQ take – Gold is an asset class that does well when other asset classes do not. So, if you have an investment portfolio, exposure to gold should be there but not so much so that the gold becomes the core. Using time-tested principles of asset allocation and looking at long term returns of gold 8.9% CAGR in 10-year period, it is clear that gold can give ‘fixed income plus’ returns at best. Use gold to diversify your portfolio but limit the exposure to below 20% at all times.

Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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