Time to look at gold and debt

Time to look at gold and debt

Are you worried about the performance of your equity-linked investments? Maybe it’s time for you to think about gold and debt, the two best-performing asset classes this year, if you haven’t done so already.

Gold exchange traded funds or Gold ETFs, which closely mirror the performance of international gold prices, have returned up to 20% to their investors while bond funds, which invest in interest-bearing debt securities, had risen to 2% till 12 March. Stocks, the best performer for the last few years, have given the worst returns—equity funds have lost 24% since 1 January after giving an average return of 30% for three consecutive years. Gold ETFs had a lacklustre performance for the first few months after their launch last year when the yellow metal traded at $650-700 (Rs26,325-28,140) an ounce. Their returns started rising in August in tandem with gold prices, which climbed to $982 on March 12.

Four gold exchange traded funds—Benchmark Gold BeES, UTI Goldshare, Kotak Gold ETF and Reliance Gold ETF—have earned 19-20% returns. DSP Merrill Lynch’s World Gold Fund, which buys into international gold mining companies, has also given a similar return.

Among bond funds, gilt funds or those that invest in government securities had posted a 2.24% return this year till 12 March. Fixed maturity plans, another category of bond funds, have been the second best performer at 1.76%, while medium-term and short-term bond funds have returned 1.42% and 1.44%, respectively. This translates into a 12-13% return on an annual basis. These funds have been able to give such high returns in a short time-span because the market prices of their underlying securities have gone up. So, will it make sense to look at these two asset classes? “Interest rates can come off this year on the back of a general slowdown in the economy, but inflation remains a concern," says Nand Kumar Surti, chief investment officer, fixed income, JPMorgan Asset Management India Pvt. Ltd. If inflation or the prices of essential items remain high, it’s possible that interest rates may not come down sharply.

Lower interest rates in the market will lead to more demand, and therefore higher price, for bonds as these securities offer already fixed rates that do not change with a rate cut or hike by the central bank. Higher bond prices will lead to increased net asset values for bond funds. Surti recommends that investors who have a one-year time horizon could look at medium-term bond funds and those with a six-month time horizon should look at investing in short-term bond funds.

However, this doesn’t mean that investors should divert all their investments from equity to gold or bond assets. “Due to the recent market fall, the percentage allocation towards stocks in the overall portfolio would have also come down. So, for investors, it’s time to relook the asset allocation. While exposure to gold makes sense when the value of dollar is coming down, I would recommend that it shouldn’t be more than 5-10% because it (too) tends to be a volatile asset class," says Amar Pandit, director of My Financial Advisor, a financial planning firm.