Performance analysis: Gold vis-a-vis Equities
With yet another jolt to the equity market the Wall Street's most reputed financial firms, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., headed towards their demise. Lehman Brother Holding Inc. early this morning have filed for bankruptcy and on the other hand sale of Merrill Lynch & Co. to Bank of America. The reason why these firm are at this dire situation of ceasing there existence is the same reason once they witnessed growth, the evil of all for the financial market crises ‘Cheap and bad mortgage loans’ The bubble of which have already consumed Bear Stearn Cos.
The effect of the event has spared no region with most of the markets ended in red. Sensex ended the day with decline of 3.35% to 13,531.27. Crude oil also witnessed a decline, but gold price witnessed a growth of 2% today which is the greatest intraday increase after the decline from its all time high on the July of this year.
Indian are one of the world largest consumers of gold. People of India for long have used gold in all forms for there ceremony and festivals. Gold ornament business thrives in India with jewelry market thriving in India at the peak of wedding season. With the decline in its price in July of this month consumers rushed to the retailers to do an early season shopping.
So is gold mere a commodity in India or is it also perceived as a investment. Well the trend for purchasing as a means for investment have been increasing over the period of time. The reason for this could also be the poor performance of Indian equity market. Gold or commodity is considered to be a hedge for equity investments. The argument is justified with the rising investment in gold asset as the uncertainty in equity still prevails.
The chart below will make it clear the inverse relationship between the two classes of investment:
Source: www.nse-india.com
The above chart plotted with the price of Benchmark Mutual Fund - Gold Benchmark Exchange Traded Scheme and the CNX NIFTY index from 1st Jan 2008 till date makes it very clear that increase in price of gold with the decline in index price.
Further with a simpler calculation, let’s take Rs 1,00,000 each investment made in equity and gold at the beginning of the year and then compare the returns. See the table below
It is clear that an investment of Rs1,00,000 in gold would fetch a return of 8.57% compared to decline in principal value if invested in equity. So should one start investment in gold and forget equity? The answer to that is no, what is more important is the proper classification of one's portfolio into various class of assets and having investments in gold would help protect wealth in the tough market condition by acting as an hedge, a 10% of total portfolios investment in gold is suggested but it also depends on the risk taking appetite of the investor.
How to invest in gold when 10 gm costs more than 10 K. well with an array of Gold ETF funds available even a small investor can have gold in its investment sheet with as less a 1/2 gm. What is a Gold ETF Fund?
Gold ETFs provided investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.
Gold ETF tracks the performance of Gold Bullion. Gold ETFs provide returns that, before expenses, closely correspond to the returns provided by physical Gold. Each unit is approximately equal to the price of 1 gram of Gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of Gold.
Gold ETF in India:
• Benchmark Mutual Fund - Gold Benchmark Exchange Traded Scheme (NSE Symbol: GOLDBEES)
• Kotak Mutual Fund - Gold Exchange Traded Fund (NSE Symbol: KOTAKGOLD)
• UTI Mutual Fund - UTI Gold Exchange Traded Fund (NSE Symbol: GOLDSHARE)
• Reliance Mutual Fund - Gold Exchange Traded Fund (NSE Symbol: RELGOLD)
• Quantum Gold Fund - Exchange Traded Fund (ETF) (NSE Symbol: QGOLDHALF)
The effect of the event has spared no region with most of the markets ended in red. Sensex ended the day with decline of 3.35% to 13,531.27. Crude oil also witnessed a decline, but gold price witnessed a growth of 2% today which is the greatest intraday increase after the decline from its all time high on the July of this year.
Indian are one of the world largest consumers of gold. People of India for long have used gold in all forms for there ceremony and festivals. Gold ornament business thrives in India with jewelry market thriving in India at the peak of wedding season. With the decline in its price in July of this month consumers rushed to the retailers to do an early season shopping.
So is gold mere a commodity in India or is it also perceived as a investment. Well the trend for purchasing as a means for investment have been increasing over the period of time. The reason for this could also be the poor performance of Indian equity market. Gold or commodity is considered to be a hedge for equity investments. The argument is justified with the rising investment in gold asset as the uncertainty in equity still prevails.
The chart below will make it clear the inverse relationship between the two classes of investment:
Source: www.nse-india.comFurther with a simpler calculation, let’s take Rs 1,00,000 each investment made in equity and gold at the beginning of the year and then compare the returns. See the table below
It is clear that an investment of Rs1,00,000 in gold would fetch a return of 8.57% compared to decline in principal value if invested in equity. So should one start investment in gold and forget equity? The answer to that is no, what is more important is the proper classification of one's portfolio into various class of assets and having investments in gold would help protect wealth in the tough market condition by acting as an hedge, a 10% of total portfolios investment in gold is suggested but it also depends on the risk taking appetite of the investor.
How to invest in gold when 10 gm costs more than 10 K. well with an array of Gold ETF funds available even a small investor can have gold in its investment sheet with as less a 1/2 gm. What is a Gold ETF Fund?
Gold ETFs provided investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.
Gold ETF tracks the performance of Gold Bullion. Gold ETFs provide returns that, before expenses, closely correspond to the returns provided by physical Gold. Each unit is approximately equal to the price of 1 gram of Gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of Gold.
Gold ETF in India:
• Benchmark Mutual Fund - Gold Benchmark Exchange Traded Scheme (NSE Symbol: GOLDBEES)
• Kotak Mutual Fund - Gold Exchange Traded Fund (NSE Symbol: KOTAKGOLD)
• UTI Mutual Fund - UTI Gold Exchange Traded Fund (NSE Symbol: GOLDSHARE)
• Reliance Mutual Fund - Gold Exchange Traded Fund (NSE Symbol: RELGOLD)
• Quantum Gold Fund - Exchange Traded Fund (ETF) (NSE Symbol: QGOLDHALF)
Comments
Could you please explain more about the other areas of avenues of investment.
Why i shouldn't forget equity for time being because i know i won't be able to gain anything now,as market is decline and their are more MNC going to face crisis which will affect market.
Umed
Coming to equities as an investment avenue in the current scenario when the globe is facing economic slowdown, especially in the US and Europe. It is true that the growth of the Indian economy might also be impacted but we can expect growth of 5%-6% p.a. even in the current scenario. It is expected that over the next two or three years, 30 per cent of all new funds will come to the emerging markets (India is a strong player) resulting from increased consumer spending & a higher purchasing power.
Hence it is expected that the sensex will move upwards in the medium to long term i.e. a time frame of more than six months to one year as the current valuations are relatively low and thus the returns generated should be more than deposits with the bank but it does involve risk so as mentioned a part of your portfolio should be in risk free asset classes like gold & debt but if you want to earn returns higher or at par with the market it is very essential to have equity investments in your portfolio.
Hope that explains your question; in case of doubt please revert.
Abdul