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Should you buy gold or invest in mutual funds?

Mudit Kapoor     August 10, 2018

There can be many ways to use your savings. One can be to spend your hard-earned money on consumables, while you can also invest it in a such a way that it gives you more returns.

Talking about the latter, investment can be done in many asset classes. But surely gold is not included in portfolio. Why? Gold has lost its potential to create wealth, and is not performing up to the expectations.

The yellow metal has always been viewed as a passive investment. People assume that value of gold would appreciate in future and hold on to it, but earn poor returns.

Let's do a comparison of the last 15 years. Gold in India cost around Rs 5,600 in 2003, while BSE Sensex was at the level of 4231.69. At present, the value of 10 gram gold is Rs 30,500 while Sensex is at an all-time high of 38,000. In 15 years, gold has appreciated 5.4 times since 2003, while Sensex grew nearly 10 times.

However, there is another investment segment that has even outperformed the BSE Sensex - mutual funds.

India is the world's second biggest gold consumer after China. Gold derives most of its demand from Indian weddings and festivals like Akshay Trithiya. Weddings are the bedrock of the demand of yellow metal, which accounts for over 60 per cent. According to Jay Gandhi, analyst with HDFC Securities: "As millennial form a higher percentage of population, the attachment to physical investment is reducing, indicating a change in the millennial psychology. Around 75 per cent of jewellery purchases are made by people in rural areas. As they would migrate to urban areas they would want assets to be light, which would further reduce the demand for gold, but this is a 20-30-year long journey."

"An equity person would never invest in gold -- the reason is the opportunity cost. In the last 10 years, the price of gold has gone nowhere with an average inflation close to 7.5 per cent, gold has provided a CAGR of just 9 per cent. Whereas any decent mutual fund has given CAGR upwards of 15 per cent." Jay said. 

In the last five years, gold has effectively eroded wealth rather than creating it by appreciating only 1.5 per cent whereas the inflation was 4.5 per cent.

Gold bars and coins, which are considered to be the true investment vehicle for gold, have seen a decline in volume by 11 per cent over FY11 to FY18. On the other hand, investment into funds have gone up drastically from Rs 5.92-lakh crore in FY 11 to Rs 23,57-lakh crore till June 2018, indicating a shift in the preference of investment vehicle.


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