Should you start investing in gold mutual funds, ETFs now?

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Gold prices in India have surged nearly Rs 2,000 per 10 gram since the beginning of this month. Experts believe that the gold bulls are back as inflation concerns rise across the globe. The trend was also reflected in gold ETFs and funds. Gold ETFs continue to attract investor attention as they garnered net assets worth Rs 303.6 crores in October. This number was lower than September because of a sharp increase in gold prices. In the last one week, gold funds managed to secure the top position in MF return charts.

Rising inflation has led to the sudden increase in gold prices around the globe and hence increased investor interest in gold ETFs and gold funds. CPI data in the US and worldwide continue to point to rising inflationary pressures, making investors doubt the “transitory” nature of price rises as claimed by global central banks.

Also read: Is it a must to have gold in your portfolio?

“The Federal Reserve maintains that interest rate hikes are only expected by the end of 2022 , which combined with rising inflation translates into lower real yields and has revitalized the trade in gold. Investors are getting nervous about inflation getting ingrained in the post pandemic world and the Fed underestimating multi-decade high inflation and making a policy mistake. In addition, rising inflation is expected to impact corporate profits, hurting the global economic recovery as well as the stock market rally. This is good news for the yellow metal as investors will choose gold to position their portfolios for a stagflationary scenario,” says Chirag Mehtaa, Senior Fund Manager, Alternative investment, Quantum Mutual Fund.

This year, the folio numbers in Gold ETFs has surged by almost 200% from 8.87 lakhs in December 2020 to 26.6 lakhs in October 2021. This indicates that gold has made inroads into the investor’s portfolio as part of their asset allocation.

“This calendar year so far, Gold ETF category has received a net inflow of Rs 3,818.1 crores; thereby witnessing just one month of net outflows, which was in July 2021 of around Rs 61.49 crores. Gold, with its superlative performance over the last few years has attracted significant investor interest. The consistent surge in their folio numbers is a testimony of the same,” says Himanshu Srivastava, Associate Director – Manager Research, Morningstar India.

In the middle of a stock market rally, mutual fund investors tend forget about diversification and other asset classes. Fund managers like Chirag Mehta suggest that investors who do not have gold in their portfolio and want to diversify should so so now. “To benefit from gold’s upcoming inflation play, and to diversify your portfolio against potential stock market corrections, new investors can use price dips to build their allocation to gold upto 10-15% of portfolio in a disciplined way,” says Chirag Mehta.

For newcomers, gold funds and ETFs help your portfolio tide through difficult economic phases by providing a hedge. Gold functions as a strategic asset in an investor’s portfolio, given its ability to act as an effective diversifier. “This is where it draws it’s safe-haven appeal. During the challenging investment environment in the recent past, gold emerged as one of the better performing asset classes, thus proving its effectiveness in investors’ portfolios. This aspect has not gone unnoticed by investors, which is evident from rather consistent net inflow into the Gold ETF category,” says Himanshu Srivastava.

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