Gold funds making a comeback. Should you invest?

Gold is going to make a comeback? Mutual fund managers believe that depreciating rupee, low small saving schemes rates and the fear of covid-19 may push gold prices further up. Gold funds have come out of the negative return territory and stand at the third spot in the return chart in one month. Does this mean that gold funds are a lucrative option now? Should retail investors invest or hold on? “The discovery of the Covid-19 vaccine led to tactical money flowing out of gold and the outflows may continue up to the third quarter. However, any negative surprises on the rate or efficacy of vaccinations or more severe subsequent waves may reverse the trend. Moreover, we are seeing a strong rebound in physical demand and resumption of central banks buying and once the tactical selling subsides gold prices may resume the uptrend,” says Vikram Dhawan, Head Commodities, Nippon India Mutual Fund. After being on the top of the return table for a year, gold funds slipped to the negative territory after the vaccination process triggered a bull run in the stock markets across the world. Gold fund returns in stand at -0.42% in one year and -6.67% in three months. However, the recent surge in Covid cases and other factors like yields and inflation led to gold funds offering 4.58% returns in one month, which is the third highest among all the equity and debt funds categories. This trend is expected to continue for some time. “Given the lingering health and economic crisis, central banks around the world, led by the Federal Reserve will continue to stay accommodative to support growth, which means interest rates will stay low for longer. This too will continue to support non-yielding gold. The ongoing stimulus measures by governments to support their economies have set the stage for higher inflation as money trickles down to the real economy. Gold tends to do well in times of higher inflation. In summary, the macroeconomic backdrop is conducive for gold prices to appreciate over the near to medium term,” says Chirag Mehta, Senior Fund Manager, Quantum Mutual Fund. Experts point out that gold was in the midst of a bull market long before the Covid-19 pandemic. The bull market in gold began in 2016 and by the beginning of 2020 gold prices had climbed by around 50% from the 2016 bottom. They believe that the pandemic just accelerated the bull run.Gold has performed spectacularly during major economic crises like the 2001 dotcom crisis, the global financial crisis of 2008 and now the Covid-19 pandemic, it has a strong track record as a hedge against event or crises risk and hence now when the covid -19 infections are on a rise, gold is gaining ground again.Now to the important question- should you invest? Or should you buy more gold? “Gold is appropriate for investors having a long-term investment horizon. Gold isn’t an easy tactical play as it thrives on uncertainties that are almost impossible to predict. If you strive for higher risk-weighted returns then asset allocation is one of the ways to achieve it. Allocation to gold is then a function of your risk-appetite of your portfolio that can be diversified through gold,” says Vikram Dhawan. “Investors need to appreciate the strategic role gold plays in a portfolio as a diversifier and source of liquidity and should thus maintain 10-15% allocation to the metal at all times. Gold prices have been consolidating and are down from 2020 highs. This should encourage bargain hunters and long term investors to step in and take advantage of low prices of this strategic asset. Investors who already have 10-15% allocation to gold, should stay put and watch gold play a risk-reducing return-enhancing role in their portfolio. Investors yet to allocate 10-15% to gold should purchase 50% lumpsum right now and stagger and accumulate the remaining 50% over the next few months,” advices Chirag Mehta.

from Economic Times https://ift.tt/3uRU5Qf