Should you switch to a gold-heavy portfolio? | Economic Times

Shekhar has been tracking gold prices and finds that in the past seven months, gold prices have jumped nearly 50% in India. This is phenomenal growth by any standards. Historically, gold has performed well in crisis times, when other forms of investments are avoided by investors. This phenomenon is called ‘flight to safety.’ Shekhar is enthused and excited by the returns and in the backdrop of the pandemic, he expects that gold as an asset class will continue to do well. He wonders if he should go ahead and replace his entire fixed income portfolio and some part of his equity funds for the next 2-3 years to gain from the potential rally in gold.Over a period of 50 years, a holding period of 10 years has fetched an average return of 10% per annum for gold investors. It beats inflation and the average returns from fixed income products. Shekhar could argue that it also comes quite close to the 15% average return on equity.However, it is important for a longterm investor like Shekhar to realise that there may be some pitfalls to holding gold as a substantial part of the portfolio and replacing other asset classes with gold. Unlike other investments such as equity and bonds, gold has no intrinsic value and cannot be assessed to establish its fair price. Moreover, there is a substantial cost to holding physical gold. Investing in gold for the short term may not yield good returns, especially when prices have already witnessed a strong rally.However, when the holding period is like 10 years, Shekhar can invest in equity and easily earn 12-15% returns per annum. While gold might be a good saving option, it can’t replace a good quality mutual fund or stocks.Shekhar should refrain from rushing into the gold wagon when prices are close to a peak. The ideal way to invest in gold is to avoid when there is a rush, let the prices cool down and then accumulate. Due to its inherent stable nature, buy and hold for the long term is an ideal strategy. The longer the holding time, the better. Do not take a short term view and use it as an example to avoid all other asset classes.Shekhar would do well to use gold as a diversification tool. He should have a portfolio aligned with wealth accumulation while maintaining stability of income. This would ensure that in times of crisis, when other asset classes will be on shaky ground, gold would play its part in ensuring steady returns for the overall portfolio.(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)