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It should be equities and gold, not equities or gold, says Chirag Mehta of Quantum Mutual Fund

"This could be an opportune time to get into gold."

, ET Online|
May 07, 2019, 12.05 PM IST
ET Online
Chirag Mehta Quantum
“Having an allocation in gold is important from risk reduction perspective because when your other asset classes are not doing well, it’s likely that gold will do well,” says Chirag Mehta, Sr. Fund Manager, Alternative Investments, Quantum Mutual Fund, in an interview on the occasion of Akshay Tritiya to

Many financial planners and investment advisors have stopped recommending gold funds to investors. Do you think this Akshaya Tritiya would be any different? Are there any compelling reasons to re-look at gold as an asset class?

We believe that every asset has a unique position or contribution to a portfolio and gold has its own as it leads to reduction of risk in a significant manner. That is why it should be in your portfolio. I don’t know why planners have abandoned recommending gold. We strongly feel gold has to have some allocation in each portfolio.

Most people whom we speak to do not allocate to gold for a time period because they have seen that for last few years gold might not have given good returns and that is why they might have gone out of gold but that’s not the way as every asset goes through a cycle and despite that every asset has a place in the portfolio. We think gold should have an allocation. But all those looking at gold this Akshay Tritiya should look at gold because the prospects of gold are much better now as compared to what it was over last few years.

Gold is supposed to be a hedge against uncertainties in the economy, both global and Indian. We are dealing with many uncertainties on both these fronts - nobody is sure about US slowdown, European growth, Indian economy - why gold is not shining?

The macro economic backdrop is turning more positive. Dollar is stalling gold from rising despite many factors working for it largely because US equity markets have been doing well. Though it is expensive but it continues to run higher and is attracting lot of flows and that is why US dollar is appreciating. It has also to do with other currencies. The U.S economy is better poised to other economies. But one other factor helping dollar was the Fed going ahead with its rate increase for the last one year but now they have stalled. They have said that rate hikes at least for this year are off the table and they have also stopped unwinding their balance sheets so from that perspective, that was one support to the dollar which is gone. Now the only thing is equity market which can come under pressure if earnings do not support going forward or if there are triggers from trade wars like we are seeing with China or likely next with Europe. That was halting gold so far and going forward I think that would turn in gold’s favour. Otherwise, there are numerous other uncertainties that can help gold.

Rise in dollar was not in gold’s favour which was increasingly coming under pressure. If you see dollar payments for trades has been declining. Dollar as a percentage of central bank reserves has been declining. Lot of central banks have been buying gold. I think that trend is here to stay and will only increase with time that’s going to be in gold’s favour.

The performance of gold funds is a cause for concern. The topper in the one-year period is giving abysmal 1.45 per cent returns. Similarly, in three-year period, the topper has generated 0.70 per cent CAGR and the highest returns generated in five-year period is 1.83 per cent. Please comment.

Gold funds will return what gold returns would be. They would be in line with the gold minus expenses and tracking error which is usually on the lower side. In some way, gold has not performed in a last few years and, as I said, every asset goes through a cycle. If you look at equities in 2013, the five-year returns were looking very dismal and that was the opportune time to move into equities and if you see five years from the 2013 period, equities did significantly better than any other asset class. So, every asset goes through a cycle and it doesn’t mean that you should abandon that asset class. Look at it from portfolio context and given gold has not performed for last five years, this could be an opportune time to get into gold.

In times when equity markets have fallen, gold has been of immense value to a portfolio and reduces downside. Like in 2008, markets were down 50 per cent and gold was up 30 per cent. Investors should have an allocation to gold and pray hard that gold falls because that would mean there 85 to 90 per cent of your funds in other asset classes will likely be doing well. Having an allocation in gold is important from risk reduction perspective because when your other asset classes are not doing well, it’s likely that gold will do well.

If we compare equities vs gold funds since 1990, the index value for gold has gone up 10 time whereas, equity market has jumped by 50 times. Why would investors invest in gold?

As I said, you cannot predict the next downturn in equities and it could be the year when you can have goal fulfillment. For instance, if 2008 was the time when someone has to fund their child’s education, the investors would have to sell that asset at a 50 per cent loss and not wait until it recovers. Had they have gold in their portfolio, they could have sold that because it had risen by 30 per cent to fund the child’s education to an extent. It should not be equities or gold, it has to be equities and gold in a portfolio.

You manage a multi-asset scheme. Is it a better way to take a small exposure to gold? How should one approach the scheme?

There are two approaches: one is where investors decide their own asset allocation, other is for those investors who do not want to describe their asset allocation but they need a fund which is a solution to their asset allocation needs, which tweak the asset classes based on its merits, risk-reward at that particular juncture and positions itself. Multi asset allocation is a kind of fund where investors do not want to take their asset allocation decision, they want a fund manager to take that decision. The fund manager will spread the portfolio allocation as per the economic conditions into various asset classes. If one does not want to take any asset allocation calls, multi asset allocation fund is a better way to do it and if one has already taken the asset allocation calls then whatever allocation they have earmarked to gold they should put in gold or gold savings fund.

What is your advice to investors this Akshaya Tritiya - gold ETF, gold savings fund or multi asset scheme? Quantum Mutual Fund has a scheme in all these three categories.

Each fund serves a purpose. If someone likes to buy online and through a broker and they want to buy it like a stock, then they could prefer gold ETF but if someone does not have a demat account and is not comfortable to buy through a broker he can come to gold savings fund or if someone wants to do an SIP, can come in gold savings funds. Whereas, multi asset allocation fund is a fund where an investors do not want to decide what asset allocation they need and they get positioned in all three asset classes. It depends on how investors position themselves and if it is just buying gold, gold ETFs serve the purpose best followed by gold savings fund and if they have not done their asset allocation, they can get exposure to all three asset classes and to gold as well.

I would like to ask investors to look at asset allocation perspective and not chase returns that are doing good at this time. You should position yourself in all the asset classes appropriately.

Also Read

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Gold Rate Today: Gold, silver down on profit-booking

Gold Rate Today: Gold futures weaken on spot demand

Gold Rate Today: Gold prices fall on ease in trade war fears

Gold Rate Today: Gold prices fall on rise in risk appetite

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