I am keen on investing in gold. There is a new systematic investment plan for gold mutual fund. Is it a safe investment option and what proportion of my investment should I dedicate towards it?

—Abhishek Khati

Historically, the role of gold in a portfolio is to provide a hedge against inflation. That is, gold acts as a “safe" asset in the portfolio when the value of money is going down relative to the value of goods in the market. Thus, it adds stability to the portfolio in volatile market conditions. However, you should note that this stability could come potentially at the cost of performance. In a bull market, the equities will outperform gold handily. So, holding a large percentage of gold in the portfolio over a long term is not advisable. Popular portfolio theories advocate an allocation of between 10% and 20% to gold depending upon an investor’s bias towards safety. Also, it is a good idea that you are considering investing systematically instead of as a lump sum investment. Please note that you should also consider your overall exposure to gold in your net assets. In India, typically, there is gold in physical form at home, in which case that should also be included as part of overall portfolio before deciding the amount to invest in gold mutual funds.

I am 35 years and plan to invest in mutual funds to meet my long-term needs such as education expenses of child, retirement and the child’s marriage. Which funds should I invest besides HDFC Top 200? Also which sectors I should look at and what should be the ideal time period for investments so that I can meet my goals?

—Nikhil M.

Mutual funds offer the benefits of diversification and professional management at low fees and are ideal vehicles for long-term goal-oriented investment plans. So, you have the right idea that you need to use them for saving for your retirement and for your child’s future. Systematic (monthly) investments in broadly diversified funds done over the long-term (five-plus years) holds the best promise of good returns for a regular investor.

Regarding your questions about sectors and time periods, you should stay away from choosing specific sectors for investments since it is hard to predict which sectors will do well in which economic cycle. Rather, your portfolio should be diversified broadly across sectors in terms of market capitalizations—large-caps, mid-caps and small-caps. About time periods, you should invest as long as you can save and as long as you have financial goals to take care of in the future. Ideally, it should be greater than five years or until your goal is reached, whichever is sooner.

You can use Mint50 list of schemes for picking funds. Please remember to review your portfolio annually to ensure consistent performance.

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