Gold funds are topping the return chart after a lull of last three years. According to Value Research, a mutual fund tracking firm, the gold fund category has returned an average return of over 15 per cent over the last one year. Even in the short-term of one to three months, returns were around 6.60-8.30 per cent.
After a dream run on the back of the global economic meltdown in 2008, gold funds ran into rough weather in the last three years. Now, once again on the back of global uncertainties (think of Brexit, future of the European Union, Trump Presidency in the US, and so on), gold is riding high again as cautious investors are looking for safe havens to park their money. Many pundits forecast better days for the yellow metal as its safe haven status gain more currency.
However, if you are planning to start investing in gold, you should always keep a few unique characteristics of the yellow metal in mind.
Gold may not give you exceptional returns
Surprised? Everybody is forecasting a bull run and we are telling you it won't give you exceptional returns. Sure, gold might shine bright if global woes are going to linger for a long time. Anyway, the negotiation between the United Kingdom and the EU is going to drag for a year or two. That alone may keep the markets world over in tenterhooks and demand for gold may remain high.
However, once the mood changes, the yellow metal may soon lose its charm. Once investors regain confidence, they typically dump safe investment options and move to risky options like stocks and bonds to earn extra returns. Obviously, that will hit gold prices. In short, if you are investing with a long-term perspective, scale down your return expectations. Many experts believe that gold may offer only single-digit returns over a long period.
Gold is a hedge, not an investment
Is it another surprise you? Well, many investment experts subscribe to the view that gold is not an investment option. It is rather an insurance premium to hedge against economic shocks. They argue that gold is not all like other investment options like stocks, bonds, etc. For example, when you are investing in a stock, you own a part of a company that is engaged in a business.
Similarly, a bond pays you interest. Gold, in comparison, is a commodity that would go up or down depending purely on the demand for it. Sure, as said before, gold shows its mettle and offer exceptional returns when investor sentiment turns bleak and all other markets are down and out. However, these phases normally do not last long. Critics also believe that most investors are not aware of the annualised returns offered by gold as they simply compare the price of gold in different points.
You don't need to diversify into gold at all
Many investment experts ask their clients to invest in gold to diversify their portfolio across different asset classes. However, there are many critics to this form of diversification. They argue that this strategy of diversifying just for sake of diversification could hurt investors with a corpus of small to medium size in the long run. This is because it may hit the overall returns from the portfolio.
According to them, small investors shouldn't heed to the advice of diversify into every possible investment option; the focus should be about optimising returns and meeting financial goals without exposing oneself to unnecessary risk. However, investors with a large to very large corpus can invest across various assets because they have the resources to take meaningful exposure to a particular asset class. Also, they don't face the risk of not able to achieve various financial goals because of lower returns from the portfolio.
Limit your exposure to gold
Even if you are a die-hard fan of the precious metal, you shouldn't go overboard with you allocation to it. Most investment advisors ask their clients, even the very rich ones, to limit their exposure to 5-10 per cent. A large exposure could offer great stability during crisis, but it can also drag the overall returns down in the long term.
For example, some top gold ETFs have given around 25-30 per cent annual returns between 2008 and 2011. The returns fell to around 10 per cent in 2012, and to -14 per cent in 2013. Even in 2015, gold ETFs gave negative returns. That means after reaping phenomenal returns between 2008 and 2011, the investors also had to deal with negative returns (losing money) in 2013 and 2015. Even in 2014, the returns were barely 1 per cent.
Don't forget any of these points
Gold ETFs haven't seen any jump in inflows so far, but the buzz around gold is likely to attract the attention of investors in the coming days. If you are also planning to join the bandwagon, it would be better to remember these points. If bullion experts are to be believed, gold is likely to see renewed interest in the coming months from investors because of the uncertainties around the globe. If so, you can reap the benefits for a couple of years. Demand for gold may weaken once the scenario changes for better. These lessons may come handy at that point. And if you are looking to ride the bull wave, be careful. It is not easy to get in and out of any bull run at the right time. - economictimes
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