Gold is not forever

Despite the current short term bounce, the returns of gold funds over a 5 year period have been disappointing

Gold is not forever

The Brexit bedlam triggered shock waves in global markets, but the fear benefitted one specific set of investors: gold bugs. Gold prices have just hit multi-year highs amid renewed market jitters over how Britain's decision to leave the European Union will impact growth and earnings. However, the short term spike in gold price does not hide the fact that the long-term performance of gold mutual funds has been pedestrian.

U.S. gold is trading near highs of $1,370. Indian gold prices have moved up in-step. Standard gold (99.5 purity) in Mumbai has climbed to ₹31,315 per 10 grams. Pure gold (99.9 purity) is trading near ₹31,465 per 10 grams. In December 2015, gold in the domestic markets was trading just below ₹25,000.

Just after Brexit became a reality, World Gold Council said: "With Britain voting to exit the European Union, we expect to see strong and sustained inflows into the gold market driven by the staggering level of protracted uncertainty that investors now face."

Cashing in on fear
The month ended June 30 has seen 4.3-8.99% gains for gold mutual funds, shows data from Value Research. This has led too high year-to-date gains on gold savings funds. Invesco India Gold Fund (31.19%), Axis Gold Fund (up 25.49%), IDBI Gold Fund (24.01%) and SBI Gold Fund (21.92%) lead the charts. Gold ETFs, which passively track gold prices, have clocked YTD gains of 24-26%, in-line with gold's swashbuckling innings.

The feel-good factor may stay when you look at 1-year returns as well. For the one year ended June 30, gold ETFs have clocked 16.68-17.86% gain, with UTI Gold ETF, ICICI Prudential Gold ETF and Goldman Sachs Gold ETF leading the charts. Among gold savings funds, returns ranged from 12.1 per cent to 15.8 per cent.

But returns for longer time horizons like 5 years change the picture drastically.

Gold savings funds as a theme were heavily marketed after the second quarter of 2011, a year when equity benchmark Sensex dropped by over 24%. Gold touched all-time highs in 2011, as demand for safe-haven assets grew in the face of economic turmoil and weak equity markets. Investments at those highs haven't really paid off.

The 5-year return for Kotak Gold Fund Regular Plan is 4.42%, Quantum Gold Savings Fund gained 5.09% and Reliance Gold Savings Fund has managed 4.7% in the same period.

There are nearly 10 gold ETFs with a 5-year history. In terms of returns, they have given 6.3-6.55% gains in this long tenure. Those returns are paltry. In the same five year period ended June 30, large-cap equity funds gave 4.2-16 per cent, mid-cap funds 8.38-23.91% and even debt funds (dynamic) managed 7.6-11.16%.

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