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Buy gold, add some glitter to your portfolio

Last updated on: March 10, 2010 17:30 IST

Buy gold, add some glitter to your portfolio


Anil Rego

Gold made a remarkable comeback in 2008 when all was not well in the markets. The volatility in the market only thrust the investor to move towards 'safe haven'.

Now it is on an upward spiral and it seems like there is no end to the upside one would derive.

Impressive performance track record

Gold has been an impressively stable asset class that is likely to provide stable returns.

Clearly, gold has been a less volatile asset class, hence is considered as 'insurance' portfolio and is often categorised under 'moderate' risk profile.

Here is a brief comparison between equities, deposits and commodities:


BSE 200

MSCI World

3-month repo rate

Gold (US $)

Gold (Rupee)

1 year CAGR

94.4 per cent

33.6 per cent

5.4 per cent

28.7 per cent

23.9 per cent

3 year CAGR

9.4 per cent

-5.7 per cent

8.2 per cent

19.7 per cent

21.9 per cent

5 year CAGR

19.6 per cent

2.7 per cent

7.4 per cent

20.0 per cent

21.7 per cent

Data: Global Insight, WGC; CAGR: Compounded annual growth rate

Price and volume pattern

Gold has in recent time seen significant volatility. Though gold price is significantly dependant on the global prices of gold apart from the exchange rate, there could be some spike in volumes around Dhanteras / Akshaya Trithiya and Diwali (festivals when demand for gold spikes up) in India.

Recently there was a sharp fall in the price of gold, which has partially recovered over the last few days.

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Photographs: Rediff Archives

Holding gold

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You can buy it in the form of physical gold bars, biscuits and coins. Jewellery does not qualify as a prudent investment, considering the fact that one has to face significant loss of value on sale of gold as a lot of your purchase price goes towards design and making charges.

The virtual way to hold gold is gaining popularity; we have Exchange Traded Funds (ETFs) and gold mutual funds (MFs). Physical holding is inherently riskier than the virtual way and the liquidity is much lower; they also come with additional costs such as locker, polishing etc.

ETFs require a demat account but these funds can be easily bought / sold and there are no problems in liquidating your gold assets held in demat form. The underlying asset is purely 'gold' as a commodity, hence is subject to fluctuations as per the price of the commodity. Returns on the ETFs available currently in India are as mentioned in Table 1.

Gold mutual funds launched lately in India are mainly feeder funds. They are funds which conduct investment through another fund, called the master fund, normally which has run successfully around the globe.

The mutual funds are far more accessible than any other form of investment, given that they allow the systematic route of investments. There are two funds operating within this space, the returns of which are as mentioned in Table 2.

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Is gold a good buy now?

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I took the road less taken by and that has made all the difference': Robert Frost

When the whole world is doing something, an easy contrarian approach will be to do the opposite. Further, jewellery is not considered as an investment at all; so if we are speaking about gold from an investment perspective, then it has to be held in physical form like coins, bars etc, or virtual form like ETFs, gold mutual funds.

With mutual funds you also have the flexibility to invest on a monthly basis thereby eliminating the need to time the market. The US dollar and gold have a track record of being inversely proportional to each other, with the US dollar gaining brief momentum due to the trouble seen in the Euro zone. In the short term the US dollar may strengthen which may necessarily take the limelight off gold.

Hhowever, 2010 as such is likely to be a turbulent year with much volatility providing the momentum for gold to spike upwards in the medium term.

Gold needs to form part of anyone's portfolio. It is a complementary asset to equities and helps reduce the portfolio risk. We recommend that one invests about 7 to 10 per cent of her/his portfolio in gold. Our preference would be in the form of ETFs / gold mutual funds.

However, considering the volatility of gold in recent times, a systematic approach to investment is recommended here as well.

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Anil Rego is the founder and CEO of Right Horizons , an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.