Gold has a rich history as a prized asset for investors, particularly during periods of economic instability. Currently, the price of 22-karat gold in India is ₹6,565 per gram, while 24-karat gold, also known as 999 gold, is priced at ₹7,162 per gram. Here’s why gold is considered a prudent investment:
Protection against inflation: As you pointed out, gold typically maintains its value well during periods of inflation. This is because gold is a tangible asset with a finite supply, unlike currencies that can be easily printed. When the purchasing power of money decreases due to inflation, the price of gold often increases to offset this decline.
Portfolio diversification: Incorporating gold into your investment portfolio can help mitigate risk. Given that the price of gold frequently exhibits a low correlation with stocks and bonds, it can offset losses in other segments of your portfolio during economic downturns.
A safe haven asset: Gold is regarded as a safe haven asset, with investors often seeking it out during periods of crisis or political instability. This is because gold is perceived as a stable and dependable store of value.
Explaining the rise in gold prices
There can be numerous factors contributing to the rise in gold prices. Some prevalent reasons driving both the increase in gold prices and investors’ desire to incorporate this lustrous yellow metal into their portfolios are:
Geopolitical tensions: Currently, geopolitical tensions are a significant factor boosting gold prices. As conflicts intensify, investors tend to become more risk-averse, avoiding stocks and other potentially volatile assets in favor of the security provided by safe-haven assets like gold.
Such geopolitical uncertainties create economic instability on a global scale. This heightened uncertainty drives up demand for gold, which is perceived as a stable and dependable store of value. Gold’s proven track record during times of instability further enhances its appeal to investors during such periods.
Monetary policy tightening: Central banks’ actions to tighten monetary policies can have a nuanced impact on gold prices, but they have indeed spurred heightened investor interest in gold.
When central banks increase interest rates, it typically diminishes the appeal of holding riskier assets such as stocks. This is because investors can secure a higher return on safer assets like government bonds. Consequently, some investors may opt to sell their stocks and allocate their investments to gold instead.
Elevated interest rates also amplify the opportunity cost of holding gold. Since gold doesn’t produce any income, the potential returns missed by holding gold become more pronounced when interest rates increase. Nonetheless, this doesn’t consistently overshadow the other factors that attract investors to gold.
A key reason central banks hike interest rates is to address inflation. Gold is frequently regarded as a hedge against inflation, as its price typically escalates in tandem with inflation. This can be especially enticing to investors during periods of monetary tightening.
Stock market volatility: Fluctuations in the equity market are another significant factor that has likely played a role in the increase in gold prices in 2023. During periods of stock market volatility and notable price fluctuations, investors often become more risk-averse. They look for assets that are viewed as more stable and less susceptible to large price swings. Gold, given its historical status as a safe-haven asset, frequently aligns with these criteria.
In times of stock market volatility, investors may seek to rebalance their portfolios to mitigate overall risk. This may include selling off some of their holdings in volatile stocks and reallocating the funds to more stable assets such as gold. This surge in demand for gold can cause a price increase.
Declining value of the rupee: A weakening rupee can indeed lead to an increase in gold prices when denominated in rupees. Since India imports a substantial amount of its gold, a weaker rupee against the US dollar, the primary currency for international gold trading, results in higher import costs for India. This elevated cost is then passed on to the domestic price of gold, making it more expensive for Indian consumers.
A depreciating rupee can also influence supply and demand dynamics within India. As the cost of gold imports rises, the supply of gold in the Indian market may diminish. Concurrently, some investors may see gold as a hedge against a weakening rupee, driving up demand. This disparity between supply and demand can further elevate domestic gold prices.
Investing in gold to benefit from price rise
Gold provides numerous advantages as an investment, which is why an increasing number of people are investing a portion of their earnings in gold mutual funds. Firstly, gold mutual funds provide a more convenient method to invest in gold. You can purchase and sell units similar to any other mutual fund, eliminating the need for storage and security considerations.
Most importantly, you can invest in gold mutual funds with much smaller amounts compared to purchasing physical gold. This simplifies the initial investment process and facilitates easier portfolio diversification. Gold mutual funds, like other funds, are regulated by the Securities and Exchange Board of India (SEBI), ensuring transparency and safeguarding investor interests.
Unlike other investments where you often depend on market information and luck, gold mutual funds are managed by professional fund managers who monitor the gold market and make investment decisions on your behalf.
The following table illustrates some of the top gold mutual funds in India to consider for your investment portfolio. However, it would be beneficial to conduct your research before making any investment decisions.
Name of the fund | 5-year returns (in %) | Monthly Investment (in Rs) | Investment tenure (in years) | Estimated returns (in Rs) | Total value of the returns (in Rs) |
HDFC Gold Fund | 14.07 | 10.000 | 10 | 14,32,124 | 26,32,124 |
Axis Gold Fund | 14.05 | 10.000 | 10 | 14,28,915 | 26,28,915 |
SBI Gold Fund | 14.04 | 10.000 | 10 | 14,27,312 | 26,27,312 |
Kotak Gold Fund | 13.81 | 10.000 | 10 | 13,90,772 | 25,90,772 |
Aditya Birla Sun Life Gold Fund | 13.76 | 10.000 | 10 | 13,82,908 | 25,82,908 |
Nippon India Gold Savings Fund | 13.76 | 10.000 | 10 | 13,82,908 | 25,82,908 |
| Source: ET Money (As of April 08, 2024) | |||||
Choosing the right gold mutual fund
When evaluating funds, it’s important to consider more than just returns. Here are some factors to consider when selecting a gold fund before deciding where and how much to invest.
Investment objective: When selecting a gold mutual fund, take into account your investment objectives and risk tolerance. While gold is often viewed as a safe-haven asset that can serve as a hedge against inflation and market volatility, it's crucial to note that gold prices can also exhibit volatility.
Expense ratio: The expense ratio represents the annual fee charged by a mutual fund to cover its operational costs. A lower expense ratio allows you to retain more of your returns.
Track record: Examine the fund's historical performance and its alignment with the price of gold. This can assist you in evaluating the fund's management team and its capability to follow the gold market.
The performance of gold over the past year highlights its consistent allure as a safe-haven asset in India. Despite some uncertainty in the future outlook, gold is projected to maintain its importance as a key tool for portfolio diversification. Gold mutual funds offer a convenient and straightforward means to invest in the gold market, providing expert management and excellent liquidity.
