Does the occasion of Akshaya Tritiya provide enough justification for investing in gold funds? Let's take a look
27-Apr-2017 •Kumar Shankar Roy
Yet again, mainstream media and financial brokers are going to town on how 'now' is a great time to buy gold. Every year, around the time of Akshaya Tritiya, these marketing pitches centre around gold's apparent great quality of being a 'store of value'. Yet, data shows otherwise; at least if gold exchange traded funds (gold ETFs) and gold funds are considered. These gold based products are down by up to 8% since last Akshaya Tritiya.
The age-old saying about gold is that it never loses value. However, the world has changed ever since those adages were invented. Gold as an asset class is not very different compared to equities.
We analysed gold fund returns for the past 5 years across 5 different Akshaya Tritiyas. The results confirm that it's only during heightened financial crisis that gold does well, and on other times, it sports some paltry returns.
The word 'akshaya' means imperishable or eternal - that which never diminishes. Buying gold is a popular activity on Akshaya Tritiya, as it is the ultimate symbol of wealth and prosperity. This one-day event is considered as a 'Golden Day' for Hindus and Jains who stock up on the yellow metal and tend to organize weddings and other festivities around the day. Most people end up buying gold on this auspicious day, but that has its own pitfalls.
As you consider buying gold on April 29, 2017, do pay attention to the returns of gold funds historically.
If you bought gold funds last Akshaya Tritiya, i.e., May 9, 2016 and held on to it, your gold fund investment is surely in red. The average gold fund return since last time is -5.3%. The worst fund has lost 7.7%, while the best performer has lost over 3%. Over the same time, debt funds have easily given 6% or more, while the best equity funds have gained over 50-60%.
If you did buy gold funds on Akshaya Tritiya in 2015, and held them till the same event day on 2016, you would have seen some returns. The best gold fund between 21 April 2015 and May 9 2016 gave a gain of more than 11%, while the worst return was about 7.4%. The average return was close to 10%. But, gold funds are notoriously volatile as our research has shown. There is no stability of returns, nor security of the principal. A good year for investors is almost always followed by a bad one.
Buying gold funds on Akshaya Tritiya on May 2 2014 and then holding them till next Akshaya Tritiya on April 21 2015, would have set you back by an average 7.7%. The worst gold fund during this period fell a whopping 13%, while even the best performer lost over 3.6%. The trend in 2013 and 2012 confirm that gold goes through ups and downs, just like any other asset.
On the occasions, gold funds have managed positive returns but those gains are not impressive (5-10% a year). Gold funds have shed value in 3 out of last 5 instances if you had bought and sold on Akshaya Tritiya.
|Akshaya Tritiya date||Average gold fund return (%) since last time||Highest return (%)||Lowest return (%)|
|* Returns for latest period are till Apr 26, 2017 Source: Value Research|
Instead of gold funds, buying gold bonds could be safer. Dhirendra Kumar says: 'If you do have a strong interest in gold, invest in sovereign gold bonds as they give you the returns of gold and some interest over and above them. Consider equity and debt for your various goals but not gold.'
An investment in sovereign gold bond will give you an assured return of 2.50% per annum. Plus, bonds can be used as collateral for availing loans. There is no recurring annual expense, like in Gold ETFs.