scorecardresearchShould we invest in debt funds or gold to allay the recession effect? 5

Should we invest in debt funds or gold to allay the recession effect? 5 analysts say this

Updated: 24 Feb 2023, 09:22 AM IST

Many investors are gradually losing their interest in the stock market due to constant turmoil. Now they are deciding between debt funds and gold investments but are still apprehensive about which to prefer.

Investors often find it difficult to choose between debt funds and gold investments.

Investors often find it difficult to choose between debt funds and gold investments.

Check the Association of Mutual Funds in India (AMFI) site and you will find so mutual fund houses launching new fund offers (NFOs) in the debt fund category. Considering how bond prices go up during the recession, many investors are anticipating a rise in the net asset value (NAV) and consequently good returns from debt funds in the future. 

However, one cannot help but notice how gold also responds inversely to the recession effect. Gold prices have shot up in recent months, prompting many to shift their earnings to gold investments like gold mutual funds, gold exchange-traded funds (ETFs) and Sovereign Gold Bonds (SGBs)

Investors are now apprehensive about putting their money in the stock market fearing more downturns in the coming months. However, many are faced with the dilemma of choosing between putting money in debt funds versus gold investments. 

We asked four analysts to choose between debt funds and gold for investing their money and why. Here is what they had to say.

Adhil Shetty, CEO, said, “Debt funds are mutual funds that invest primarily in fixed-income securities such as bonds, debentures, and other money market instruments. Debt funds are ideal for investors who are looking for a low-risk investment option that offers moderate returns. They are an ideal investment option for conservative investors who are looking for regular income, short-term investors, and those who want to diversify their portfolios. The share of debt funds in the portfolio will change based on the risk appetite, life-stage, and financial goals of the investor.”

Shetty added, “Gold, on the other hand, is a volatile commodity with sudden spikes and dips in prices. Invest in gold only after assessing your existing portfolio and evaluating your returns expectations, risk appetite and liquidity requirements. Ideally, gold should not form more than 5% of your investment portfolio, as gold prices tend to flat-line over long periods of time. So, despite the recent upward trend, gold alone may not be sufficient to meet your financial goals on time. . If you are looking for a way to safely invest in gold, Sovereign Gold Bonds (SGBs) are your best alternative, especially if you have a long investment window of 5-8 years. If you are looking for a more liquid option, you can consider gold ETFs that allow you to invest in gold in a dematerialized format, which can be bought and sold on the stock exchange just like shares. You can also invest in gold mutual funds, especially if you are looking to make regular investments instead of a one-shot investment. It only makes sense to invest in gold jewellery if you want to wear it. As in investment, digital gold is always a better option.”

Aditya Shah, Founder, JST Investments, said, “Both gold and debt products are an integral part of the portfolio. Gold should be a minimum of 10 per cent of the portfolio and debt products should be used for short-term needs. So, risk profile properly and then decide on an appropriate allocation to debt and gold.”

CA Kanan Bahl, a financial educator and growth consultant said, “We need to understand that good quality debt funds yield lesser than gold over a long-term horizon. However, debt is more stable than gold. So, you need to understand what percentage of your portfolio you are allocating goes towards volatile vs lesser volatile. Moreover, if you buy SGB, apart from the upside of gold, you get 2.5 per cent per annum interest on your investment value. SGBs can be tax-free if you hold them till their maturity date.”

Viral Bhatt, Founder, Money Mantra said, “Debt funds are generally considered a low-risk investment option and are suitable for conservative investors who are looking for a stable income stream. Debt funds provide better returns than traditional savings accounts, but the returns are not as high as equities. On the other hand, gold is a tangible asset that has been considered a safe-haven investment for centuries. During times of economic uncertainty, investors tend to flock to gold as it has historically held its value better than other assets. Gold is also seen as a hedge against inflation, as its value tends to rise when fiat currency’s purchasing power declines.”

Bhatt added, “The choice between investing in debt funds or gold ultimately depends on an individual's investment objectives, risk tolerance, and investment horizon. Debt funds may be a suitable option if an investor is looking for a stable income stream with minimal risk. On the other hand, if an investor is looking to hedge against inflation or economic uncertainty, gold may be a better option. As for the proportion of investment, there is no one-size-fits-all answer. The proportion of investment in debt funds and gold depends on an individual's investment objectives, risk tolerance, and investment horizon. Investors may choose to diversify their portfolio by allocating a certain percentage to debt funds and a certain percentage to gold.”

Vasudha Gupta, Finance Lead, CommsCredible said, “Both debt funds and gold investments are taken as safe mode investments but if we compare both in terms of returns considering past trends then debt funds is underperforming in comparison to gold investments. Debt funds are good for the short-term period however gold investments are good in the long term due to market fluctuations. Every investor should maintain a balance between both of the investments and include gold in their portfolios depending upon the term of investment and market fluctuation risk.”

Debt funds have undoubtedly generated very good returns similar to gold in the last decade. This is despite the Indian economy having survived the market doldrums on a global scale. However, past returns also indicate gold reacting more aggressively to continuing bear trends, thus, prompting many people to decide their asset allocations based on their financial goals and how they view their financial independence in the long run. 

We draw a comparison between digital gold, gold ETF and gold bonds. 
First Published: 24 Feb 2023, 09:22 AM IST