Apna Time Aayega! (gold vs mutual funds)

When I see the meteoric rise in gold prices and compare it with the recent fall in mutual fund NAVs, the first line of the Gully Boy song starts off in my head. Then people start off that old litany – “See, gold is a safe investment. I knew mutual funds would never be able to sustain”. Once again, I want to shake them and point out that if they are just looking at absolute returns, their assessment is wrong. To truly understand the returns and to compare asset classes, you have to look at the compound annual growth rate.

Date	Gold Price per 10 grams	1Y Return	3Y CAGR	5Y CAGR
16-Sep-14	28,010
16-Sep-15	26,345	-5.9%
16-Sep-16	30,916	17.3%
15-Sep-17	30,855	-0.2%
17-Sep-18	31,680	2.6%	6.3%
16-Sep-19	39,120	23.4%	8.1%	6.9%

From this chart, we can see that gold prices have been flattish for the previous four years and then there has been a sharp rise over the last year. This means if you bought gold 1 year back, you would have got a whopping 23.48% return. However, if you bought gold 3 years back, your year on year return would be 8.16% and if it was 5 years back, it would be just 6.91%.

In my earlier article, I had written about physical gold and its attributes as an investment. To briefly summarise it

• I would encourage people to buy gold as it is good to diversify investments across asset classes (I believe in diversification, that’s why I promote mutual funds
• It’s difficult to store and safe guard physical gold so one cannot buy large quantities
• Jewellers offer 11-month instalment schemes to buy gold. These are convenient but there is no real recourse if the jeweller fails so choose the jeweller carefully

Now, if you don’t want the hassles of storing physical gold, gold exchange-traded funds (ETF) may be the perfect solution. In 2002, the idea of a gold ETF was conceptualised. Their features are

• these are funds that buy physical gold (of 99.5 per cent purity)
• the units of gold ETFs are traded in exchanges

Simply put, you can log onto your demat account and buy units of a gold ETF. The fund uses your money (and of other investors) to buy physical gold. Your advantages are

• invest in gold without storage hassles
• guaranteed purity (each unit is backed by physical gold of high purity)
• listed and traded on stock exchanges
• one can purchase as low as one unit (which is roughly 1 gram)
• transparent and real time gold prices.
• tax efficient if you hold for more than three years
• no fear of theft, units are held in demat form
• no entry and exit load

For those of you who are wondering if this actually works, take a look at the performance of SBI Exchange Traded Gold Fund (data from valueresearcholine.com)

SBI Exchange Traded Gold Fund

Performance

	YTD	1-Month	3-Month	1-Year	3-Year	5-Year	10-Year
Fund	22.02	-0.13	16.99	25.43	6.06	6.67	8.16
Domestic Price of Gold	22.72	-0.07	17.21	26.59	7.19	7.78	9.25

You can see that the returns are mirroring the year on year returns you get from gold (returns mentioned against gold are not factoring in any charges and hence they are slightly higher).

At this point either you’ve had enough of this gobbledegook or you’ve asked the pertinent question – how does this compare with a mutual fund? Let’s look at the performance data of SBI Blue Chip (large cap) fund (data from valueresearcholine.com)

Performance

	YTD	1-Month	3-Month	1-Year	3-Year	5-Year	10-Year
Fund	0.83	-0.45	-6.11	-2.18	5.10	8.54	10.81

Compared to gold, the fund has fared badly in the last 1 year. It has returned slightly lesser in 3 year comparison. However, across 5 year and 10 year comparison, it has done better. Remember when the markets had peaked in May 2019? At that time, the mutual fund returns would have looked much better. In the coming months, you can expect the returns to go down.

So you see why it is important to diversify. Now gold is up and equity mutual funds are down. FDs and ultra short term debt funds give consistent but low returns. Allocate your funds wisely and you will see that ‘apna time aata rahega’ J If you want to know more about personal fund allocation, gold ETF details or just have a chat on financial planning, drop me a line at mathewpravin@yahoo.com and I'll get back to you.