Why your portfolio should have a limited exposure to gold   Jul 28, 2014

India is one of the largest consumers of gold in the world. A lot of people have emotional attachment with the gold. This is because it is either passed on by their forefathers and older generations, or many who weren’t privileged enough to inherit in such manner, now want to buy and pass on to their loved ones. Be it weddings, auspicious occasions or for investment purposes, buying gold is inevitable for most of us.

However, rather than viewing gold merely as a precious metal it is important to perceive it as a monetary asset as well. You see, gold carries a store of value in times of uncertainties. Therefore, it is considered as a hedge against inflation and thus can help you preserve the value of your hard earned money. Also, these days as the Governments of many developed economies are resorting to printing more money, the value of the yellow metal has increased. Moreover, gold is a good portfolio diversifier as it usually has a negative correlation with other asset classes. Therefore having gold in your portfolio is extremely important.

While including gold in your investment kitty is a good thing, investing only in gold is not. It cannot be denied that gold has depicted wealth creation traits in the past; but this does not mean that it should form a dominant portion of your portfolio in your endeavour towards wealth creation. In order to grow your hard earned savings in a systematic and risk effective manner, it is important to invest in other asset classes such as equities and debt instruments as well. Equity as an asset class although risky, has the potential to reward investors with high capital appreciation and dividend income when selected prudently. Debt is a relatively safer avenue which can preserve your capital and even provide you with regular income. You see, gold on the other hand, can provide you with capital appreciation but does not offer you any regular flow of income. Nevertheless, over the long-term of say 10-15 years, gold can clock appealing returns.

The table here shows that if you had invested Rs 10,000 each in equity and gold on July 24, 1998, then the value of your investments in gold and equity would have been Rs 62,436 and Rs 1,09,183 respectively as on July 24, 2014.

It means that over a period of about 16 years, your returns in gold would have grown at a compounded annual growth rate of around 12% while your investments in equity would have grown at a compounded annual growth rate of around 16%. So your investment in equity would have outperformed gold by around 4% p.a.

Importance of productive assets…
You see, some asset classes such as equities tend to outperform all other asset classes in the long run. So in order to make productive investments, you need to choose your asset classes and investment instruments wisely. Or else you would not be able to generate alpha on your investments and thus would miss out on some important financial goals such as retirement, children’s education and so on.

Does this mean you should invest only in equities? Absolutely not. Asset allocation is the key to meet financial goals in a planned and systematic manner. Investing your hard earned money only in equities could expose it to a large amount of risk and erode its value during market down turns. Hence it is imperative to also include debt and gold in your portfolio depending upon your risk appetite and time remaining for goal realisation.

PersonalFN is of the view that although gold should most definitely form a part of one’s portfolio, it should not occupy a dominant portion. You should consider your investment time horizon and accordingly allocate 10% to 15% of your total portfolio towards gold (via gold ETFs). Moreover it is important to remember that gold is not an instrument to make quick money but a solid long term asset that offers store of value. Hence you should ideally invest in gold with a longer investment horizon. You can also take the help of an experienced financial planner for determining your asset allocation pattern and investing in well researched investment avenues.

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