Dhaval Kapadia, Director, Portfolio Specialist, Morningstar Investment Adviser (India) answers queries in The Financial Express, from where the below has been taken.
In the recent past I have seen some recovery in Gold exchange traded funds, or ETFs. Given the volatility in Gold ETFs, should I redeem my units?
— Anupam Mishra
Historically, gold has acted as a good hedge against inflation and financial market volatility. During periods of economic or financial market crisis, gold tends to perform well and is considered a safe haven vis-à-vis other asset classes like equity and fixed income.
For instance, during the period from early 2008 to 2011, when equity markets witnessed significant volatility, gold generated an annualised return of 26.8% (3 year). But unlike equity and debt which typically pay out either interest or dividends, gold isn’t an income generating asset.
Further, a long-term analysis of the performance of various asset classes indicates that gold under-performs equity. Over a 25-year period starting 1990, Indian equities have generated an annualised return of 15% versus 10% for INR gold.
Overall, gold acts as a good portfolio diversifier but due to its performance and income related characteristics outlined above, allocation can be limited to 5% to 10% of one’s portfolio. In case the allocation to gold in your portfolio is around these levels, you can continue to hold the units.
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