Asserting that equities and gold are highest return generating assets over a very long term, experts are now recommending increasing share of the precious metal in one's investment portfolio, despite that fact that it has underperformed the past few years.
Gold has lost some sheen over the past few years, especially after 2013, when prices fell from their peaks after the Indian government discouraged buying by increasing duty and restricting imports. During that period, equities fared quite well.
Real Estate is also an important asset class but is bogged down by several regulations, taxes and the illiquid nature of the asset. Besides, neither is long-term return data on real estate available, nor are the returns standard across the nation.
Ever since data on returns from equities became available in terms of the Sensex some four decades ago, stocks as an asset class have been delivering very good returns. However, with the market getting better regulated and becoming more transparent, compliant and mature, the returns seem to be moderating from 19-20 per cent during the past two decades of the 20th century to 12.5 per cen and 9.5 per cent, respectively during the first and second decades of the 21st century.
In the previous decade, returns from gold were higher than those from equities.
The scene seems to be changing with gold now trading at an all-time high in India and, more importantly, the recent clamour for increasing its share in the investment portfolio.
The metal has several advantages and unique features compared to other asset classes. Gold behaves differently from other financial markets, especially equities. Factors that guide investors to buy gold are also different. the metal is a hedge against inflation globally. In India, gold price is still based on the cost of import and hence a fall in the rupee-dollar exchange rate is reflected in it. The price of gold takes care of rupee depreciation.
Financial planners and advisors have so far been asking investors, including high net worth investors, to keep 5-10 per cent of their portfolio in gold. The reason for keeping the share so low despite its time-tested potential to yield high returns was that gold is also a consumption asset in the form of jewellery, which isn't an investment.
Even coins bought for investment have sentimental value and when it was time to sell gold for liquidity or returns, gold coins were the last to be sold. Such a decision should not be taken if one is purely an investor.
Today, However, apart from gold exchange-traded funds, even sovereign gold bonds have emerged and are listed on stock exchanges. Already two options that obviate the need to hold physical gold have made the yellow metal truly an investment product that comes without the sentimental attachment associated with physical gold.
As of now, very small or retail investors may be having 10-15 per cent of their portfolio in gold, especially in tier-II and tier-III cities. However, according to Bhargav Vaidya of B N Vidya associates, high net worth investors don’t hold gold over 5-10 per cent. He advises his clients to hold a minimum of 15 per cent in gold which is also a store of value and in times of crisis of the kind being seen currently, the share of gold should be higher, say, up to 25 per cent.
The reason HNIs hold less gold is that sovereign gold bonds aren't available when they have money. If they miss the period during which bond issue is open then they have to wait. Even in listed bonds, liquidity is thin and large buying increases cost.
Gaurav Mashruwala, a certified financial planner and practitioner says, “Depending upon their need for funds, long-term investors should consider increasing the proportion of gold in their portfolios provided they treat gold as an investment asset only.”
Globally, the share of gold in the portfolio is not all that high, though inflation and growth levels are not so high either. Nigam Arora, author of Arora Report and market expert says, “The Arora Report’s recommended allocation to dollar-based investors has been 3-5 per cent. If gold pulls back, the Report is likely to increase allocation in gold to 5–7 per cent. Indian investors may want to consider 10–15 per cent.”
Increasing the share of gold in the portfolio in times of crisis is a global practice.