Should you invest a mutual fund with a gold and silver combo?

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If you are looking to add the glitter of precious metals to your investments,

AMC is offering a first-of-its-kind 2-in-1 package. It is currently running an NFO for Edelweiss Gold & Silver FoF, a fund of funds that will invest in a mix of gold and silver ETFs. Will investors benefit from this combo?

Both gold and silver are coveted as precious metals in Indian households. While both are in limited supply even as demand is high, these have very differing propositions as investments. Gold is perceived as a safe haven asset that can store value during times of economic distress.

The yellow metal’s pricing is mostly guided by investors’ perception of strength in fiat currencies, mainly the US dollar. Its consumption demand—in the form of jewellery—is also another factor setting price trends. Gold is not correlated to equities and is, therefore, considered useful as a diversifier in a portfolio. Silver offers a completely different proposition. Half of the demand for silver comes from industrial use. Silver finds extensive use in manufacturing of smartphones and tablets, solar panels, electric vehicles, among others. “Industry-led demand can work for or against silver, depending on the pace of economic activity,” points out Chirag Mehta, CIO, Quantum AMC. It tends to do very well during commodity-driven rallies, vastly outperforming gold.

Being exposed to different dynamics, silver and gold prices tend to move differently. The last 10 years have not been kind to either precious metal. While gold has yielded 5.5%, silver has fetched 0.7%. But the intervening years have seen wide divergences in the price movements of the two commodities. By retaining equal allocation to both precious metals, the Edelweiss Gold & Silver FOF aims to capture this divergence in return. It will not take any tactical calls—favouring either gold or silver—based on their prevailing price trends. When a sharp uptick in either commodity skews the balance between the two, the fund will simply sell the outperforming one and buy the other to bring back parity.

This automatic rebalancing will essentially allow profit booking without any tax liability for the investor. Radhika Gupta, MD & CEO, Edelweiss AMC, asserts, “Investors can take advantage of gold’s properties to hedge away inflation and leverage the growing use of silver in the manufacturing of new-age technology products. The Fund of Fund structure provides ease and tax efficiency while rebalancing.”

But the question, do investors need both precious metals in their portfolio in the first place, remains. Most experts maintain that while there is a long term investment case for gold, it is not as compelling for silver. Silver tends to be a very volatile commodity. While standard deviation (a measure of volatility) in gold price since the year 2006 clocks in at 13%, silver has reported 26.5%—nearly as high as the Nifty50 index. Further, even as gold shows almost zero correlation with equities in the long run, silver exhibits a mild positive correlation.

The higher volatility in silver and its correlation with stocks makes it less relevant as a diversifier than the yellow metal. Mehta insists, “Silver tends to exhibit similar behaviour as other risk assets and doesn’t help the portfolio in times of crisis.” Experts maintain that gold is sufficient as a diversification vehicle for anyone’s portfolio beyond equities and fixed income. Harish Menon, Co-founder, House of Alpha, remarks, “Gold alone is enough for diversification. Adding silver to the portfolio does not yield any added benefits.”

What could go in the favour of the two precious metals is the inverse correlation both have with the dollar. With US economy weakening and the interest rate hike cycle nearing its end, it is expected that the dollar may weaken, which will lift precious metal prices in coming years. But this negative correlation theory may be observed only after the excesses of liquidity impact gets normalised, observes Menon. “The deluge of liquidity due to unprecedented money printing and accommodative monetary policy has diluted the traditional logics of economics. Having gold/silver as diversification tool may not be effective in this new normal in financial markets.” This is already visible in flat to negative prices of gold and silver this year despite decades-high inflation and global uncertainties.

Even in the long term, normalised scenario, portfolio diversification can be achieved purely with gold. Silver may give a bigger kick to the return, but will also likely bring higher volatility in its wake. If the intent is to bring down the volatility associated with equities, adding silver to the mix will not yield desired results. Experts insist that investors should treat gold and silver as separate investments. Mehta argues, “Silver is more a cyclical commodity that works as a tactical bet rather than a long term investment.”

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