Gold or equities: Where would you invest this Diwali?

Diwali means a reason to hop, shop and drop for most Indians. Investing in gold is a favourite for most people considering the cultural affinity and religious affiliations this metal has with this festival. For the past decade or more, the definition of “investments” has largely changed. Many people have moved on to buying stocks or paying to accumulate more mutual fund units. While both equities and gold have earned returns in the past, what brought about this tectonic shift in people’s buying behaviour?

Portfolio diversification can be one reason, but more than that constant push by fund management companies highlighting how several of their funds have not only performed better than gold but have also helped many to create an enviable corpus. If you cannot identify and select stocks, you may go for mutual funds that invest in a basket of stocks, thus, benefiting their investors during every business cycle.

Gold versus equity

A comparison of returns from equity and gold underscores how gold acts as a perfect hedge against inflation, especially, when the market is reeling under inflation or weakening rupees versus the dollar. Equities have shown much resilience in the past; they have fallen flat and bottomed out much to the chagrin of many new investors but have always bounced back with more vigour. The debate between equity and gold investments remains with one set of investors vouching for the sheen of gold while the other continues to rely on the undulating movement of stocks.

Why invest in some gold?

Contrary to expectations, gold lost its sheen even in the face of inflation. This raised questions on the validity of their inclusion in an investment portfolio. A glimpse at the returns from gold over the past 20 years reveals a continued rise in the price of gold interspersed by intermittent falls. 

While in most cases, the gold price rise has been gradual and consistent, the inflation in 2010 saw a sudden and dramatic rise in the price of its metal. If not exponential, gold prices still went high up in 2010 and then again in 2013. Though historical data does not guarantee future returns, it still forms the basis of your decision regarding a certain asset that you intend to hold for a long period.

Below is the data showing gold prices from 2009 to 2021. Gold prices have gone up and down several times in between. However, numbers show how the price rise was exponential first in 2010 and then in 2019, thus, lending investors the much-needed respite from the continuing gloom in the global financial market.

What about equity?

Equities despite having been subject to immense pressure in the past decade have delivered close to 11-14 per cent. Compared to this, gold investors have earned roughly 5.7 per cent returns in the past decade.

Take, for example, the ICICI Prudential Bluechip Fund which has delivered roughly 14.32 per cent returns in the past one decade. You can also look at the HDFC Small Cap Fund which has yielded close to 17.75 per cent returns over the past 10 years. Moderate investors opt for hybrid funds such as the Nippon India Balanced Advantage Fund which has delivered close to 11.57 per cent returns. 

The returns from all these funds are somewhere close to the peer average of 12.75 per cent returns, which is why personal finance experts always advise their client investors to park their earnings in mutual funds.

The persistent returns from equities can be attributed to the “Power of Compounding” that earns returns not only on the invested amount but also on the returns earned on them. The only requirement is that one must remain steadfast to investments and not succumb to the peer pressure of redeeming their investments in case of sudden and unwarranted market slowdowns.

Gold versus equities

In 2010 and 2012 followed by 2019, there has been a bull run in gold prices. Barring a short spurt in gold prices triggered by macro factors, there has not been much movement in gold prices. However, a long-term review of gold prices has revealed 11.6 per cent, 12.4 per cent and 9.4 per cent returns over the past 15, 20 and 25 years, respectively. This is awful, especially, for investors looking to create long-term wealth on their investments.

Equities have suffered too frequently, though the fall has been short and the rise persistent. Investors have realized the importance of including equity instruments in their investment portfolios. This also explains the continued SIP investments even when the markets are down. Some investors have also utilised sporadic market meltdowns as an opportunity to invest in lump sum amounts.

Investments in gold are not so regular. Many people put their money in digital and physical gold. However, the number of people now putting their money in Sovereign Gold Bonds (SGBs) has also gone up. Thanks to the launching of the RBI Retail Direct Scheme, one can invest in SGBs online without going to banks or financial institutions earmarked for the sale of these bonds.

Affinity towards gold

History highlights how gold prices have always responded strongly to inflation. Corresponding to high inflation rates, gold prices have always shot up. The current geopolitical tensions have ushered in the possibility of a global recession. Countries are struggling against high prices, the supply management system in many countries is now choked due to the ongoing border skirmishes between different countries and there is a danger of many countries succumbing to food scarcity. Situations like these encourage many people to invest in gold thinking that adverse situations coupled with the growing strength of the dollar would result in a spurt in gold prices.

The constant hike in interest rates is another reason for many people viewing gold as one of their preferred options. Also, a quarter-to-quarter comparison in gold prices revealed a heightened gold demand by 43 per cent in the June 2022 quarter compared to the June 2021 quarter.

Investors are rushing to put their money through gold mutual funds, gold exchange-traded funds, SGBs, gold coins and bullion and digital gold. All these gold investments have different repercussions in terms of returns and taxes though the idea behind parking money in them is to hold them for a prolonged period.

Gradual equity investments

This means that you may consider stepping up your SIP investments on a monthly, quarterly, half-yearly or annual basis. Stepping up investments allow you to beat inflation must faster as more investments means more units accumulated with time and growing net asset value (NAV) of the fund. Apart, with decreasing value of money, investors must not expect to earn good returns with stagnant investments.

Deciding your portfolio

Not all investments perform simultaneously. Some take ages to earn you the desired returns. Others yield you a good profit with time while also shielding your investments from being beaten by the impact of inflation.

More than returns, it is our inherent emotions stemming from cultural connects that prompt us to invest in gold. This is evident from many people buying small quantities of gold during every festival. The attachment to the yellow metal also comes from cultural connections and a conservative risk profile.

Gold is not a liquid investment, unlike shares and funds that can be sold and redeemed when required. The illiquid nature forces many people to think otherwise before putting too much money into gold. Though SGBs and gold ETFs can be sold on the exchange in the secondary market, the lack of demand coupled with high taxes makes gold investments an unviable decision.

The online nature of investments has eased the fund redemption process. All you must do is select the particular fund portfolio that you wish to sell and click the “Redeem” button. The money is credited to your account within 24-48 hours, thus, lending you enough liquidity when needed.

Both equity and gold are necessary to ensure portfolio diversification. You must allocate your money as per your risk appetite and financial goals. Apart, pay attention to the investment tenure too. If you are aiming for short-term investments, go for liquid and overnight funds. If you wish to invest a little longer, say a decade or more, go for equities. Holding on to SGBs till the date of maturity will not only ensure adequate returns but will also give you the benefit of a tax-free maturity amount.

Savings on taxes also help by putting money in equity-linked savings schemes (ELSS). These are also kinds of equities that allow you to save taxes on your investments up to ₹1,50,000 every year. Gold investments invite tax under the existing income tax slabs, be it gold MFs, digital or physical gold. You get tax relief only on SGBs if held to maturity.

Many middle-class investors fail to invest in the market fearing that they would lose their investments. It is their unwarranted fear that actually causes them to miss out on the importance of enough investments. For those willing to ride over market fluctuations and invest their money in bits every year, equities can indeed help you beat inflation and garner an impressive corpus in the long run.