Gold funds off to a good start in 2016

Safe-haven tag sees asset class outperform in the ongoing financial turmoil

Mutual funds with gold as their underlying assets have started year 2016 on a firm footing. At a time when the stocks markets are in a turmoil and majority of equity-oriented schemes have generated negative returns for investors, gold funds have emerged outperformers across all asset classes thus far this year.

In the past month, schemes in the gold funds category have given an average category return of 6.77 per cent - the highest across the board. During the same period, the rates of standard gold rose from Rs 25,310 to Rs 26,980 per 10 grams. Gold, which is considered a safe-haven investment, has found favour with investors amid turmoil in global equities. The rise in gold prices came while key benchmark stock indices have lost nearly nine per cent, triggering deep cuts in net asset value (NAV) of majority of the equity schemes.

Interestingly, gold as an investment has been almost relegated by investors over the past few years. Continuous outflows from gold funds amid closures of accounts was being seen as a shift of investors from gold to equity as an asset class. However, the past month’s performance, though too short, appears to have proved many wrong.

While fund managers still maintain that gold might be a safe bet, it might not be able to provide high double-digit returns like equities.

Amit Nigam, head of equities at Peerless Mutual Fund, says, “Gold is a beautiful hedge, but it is not a return-generating asset class. Investors, with investment horizon of 2-3 years and who want stable return, may go for funds which has gold as a component of around 20 per cent of the portfolio. Typically, three-in-one kind of products (20 per cent each in gold and equity and rest in debt) might be suitable for such investors. However, for long-term investors, equity is the only asset class to invest in.”

According to Chirag Mehta, senior fund manager at Quantum AMC, in such volatile times, investors would do well to recognise the shifting economic landscape by allocating a portion of their portfolio to gold. He adds, “US equities are still trading at high valuations and, therefore, offer a less attractive option for both US and foreign investors. In a volatile asset environment and an era of experimental central banking, it’s difficult to forecast whether or not the bottom in gold has been placed. Given the macroeconomic picture, the downsides look limited in gold and this year will likely mark an inflection point in the yellow metal. Gold has already started off the New Year on a solid footing like it has done for much of last decade.”

Ritesh Jain, chief investment officer at Tata Mutual Fund, says, “Gold is a hedge against political instability. All incremental actions from central banks have not brought back growth. Any loss in trust of policy makers could lead to gold prices regaining their lost glitter.”

As on December 31, the total assets under management of gold funds were to the tune of Rs 5,773 crore, down from a high of Rs 10,000 crore a few years ago.