Is it a must to have gold in your portfolio?

Everyone is bullish on gold these days. Investors are extremely eager to invest in the yellow metal because it has given around 40% returns in the last year. Financial planners and advisors are once again talking about why gold must be a part of every portfolio. Not long ago, the same set of advisors were asking investors to stay away from gold because the precious metal was stuck in a tight range for a long period.

You must be wondering whether you too should take the plunge and invest in a gold fund to participate in the rally. In other words, should every investor portfolio have gold in it?

ETMutualFunds.com spoke to two financial planners for their take on the issue.

Raj Talati, CFP and Co-founder, ABM Investments, based in Vadodara
First of all, an unpopular opinion: – gold is not an asset class that can give you great returns over a long time. This is specifically for retail investors. If you have a small portfolio and big goals, you need asset classes like equities. However, Indian people have an obsession with gold and if that has to be fulfilled, the best way is to stagger your purchase. I would say, if you know you would need to buy gold at a later stage, buy it via SIP in MFs or ETFs and save yourself the locker charges etc.

However, what is happening right now is not that. This is exactly what we saw in 2016 when people started putting all their money in small caps. There are two ways in which you can buy gold- as an asset allocation to diversify your portfolio or as a strategic investment for a later purchase. If you start buying after a record spike in gold, I don’t see it as strategic at all.

Still, if you want to accumulate over long periods, you can. In terms of asset allocation, you should be selling gold right now. That’s right. Your 10% allocation to gold would have gone to 12-15%, you have to cut it back to 10%.

Gold is a good hedge for a portfolio. It will certainly not fall like a small cap fund. However, gold has a tendency to remain flat for as long as seven years. That’s why we always recommend that you shouldn’t go overboard with gold as an asset class. These investors who are jumping on to gold right now need to understand that they bought gold at a higher price and will sell it when it is flat and go back to equity which would have moved up by then. Hence returns were not made.

Gaurav Monga, Director, PxG Consultants, a Delhi-based financial planning firm.
I have always said that gold as an asset class should be seen only as a diversifier. Sure, there are other diversification tools as well. Over the years, geographical diversification has came up quite well. However, we understand that even though gold can go without any returns for years, but it doesn’t fall much.

If you have bought units when gold was at Rs 35,000, chances of it going to Rs 30,000 are very low. That’s why gold becomes important for those who want to safeguard an aggressive portfolio. This steady nature is needed more in times of crisis. In a global crisis which is unprecedented, an allocation to gold can hedge your portfolio and hence we recommend gold funds and ETF.

Having said that gold funds and ETFs shouldn’t be looked at as primary return generators in the portfolio. Don’t go overboard on gold because in the long run it wont give you returns to meet your financial goals.

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