Gold mutual funds return upto 20% in the past three years. Is this reason enough to invest?

Remember what our elders used to say, “Investment in gold never fails”? When nothing works, the shine of the yellow metal reminds us that not all is lost. Gold is deemed to be the best hedge against inflation, so much so that personal finance experts recommend their clients allocate a portion of their earnings to gold investments. Be it physical gold or buying sovereign gold bonds, putting money in gold exchange-traded funds (ETFs) or investing a portion of your money in gold mutual funds (MFs), some investment in gold must be made as a necessary shield to secure against the market’s tumultuous movement.

The value of gold as an investment was much realized in 2008 when markets crashed and the prices of gold shot up correspondingly. The yellow metal showed its mettle again during the market crisis prompted by Covid-19 and subsequent macro factors. With the price of gold equally high as its charm and shine, many investors queued up to invest in gold mutual funds wherein you can start investing with as low as ₹1000. There are many gold mutual funds in the market, though a comparison of three years’ average returns underscored DSP World Gold Growth Direct Plan as the best performer amongst all. 

The markets had risen in between, thus, prompting many investors to shift to equity funds from gold investments. Rising interest rates then encouraged many investors to park some of their money in debt funds. The lacklustre performance of gold when the markets went up raised questions on the validity of their investments in the long run. However, with the Russia-Ukraine war gradually fomenting into a formidable shape and size, the prices of crude oil rising, Russia accumulating more gold to stabilise its economy and the Fed hiking interest rates and inflation raising its ugly head again, it is time for gold to shine again.

There are two schools of thought when it comes to investing in gold. One group says that gold as an asset class has compounded at a consistent rate of 8.89 per cent since the country’s independence. However, this is too low compared to what most equity investors earn as some of their equity investments have yielded close to 15-20 per cent returns. Equity investors do not view gold for its investment value and look upon it as just another form of currency. These investors stress how gold does not qualify as a good asset class. However, some others say that buying gold reinforces the habit to save and persistent investing as a long-term investment because people rarely sell gold. The habit to buy gold occasionally helps many to compound wealth in the form of gold. The first school of thought is based on rational reasoning while the second is based on the reason of alchemy.

Explaining the importance of gold in one’s investment portfolio, Dhirendra Kumar, CEO of Value Research said, “One should invest in equity for long-term growth and debt for short and medium-term goals and reduce overall volatility. One should invest in equity through a diversified portfolio of stocks or stock funds, or index funds. And in debt through bond funds, bonds, fixed deposits or small saving schemes. Every few years in a gloomy global economic outlook, gold does well. Most investors can do without investing in gold. In readiness for the economic doomsday, one can reasonably have 5/10/15 per cent in gold.”