“Why is there no gold in my portfolio?”

July 6, 2012 . Srikanth Meenakshi

One of the frequent questions we get from our investors that are consulting with us is regarding gold mutual funds. Most of the time it is merely a question – about whether or not gold mutual funds should be in their portfolio. Some times the investor gets upset that we did not include gold in the portfolio that we designed for them, and questions if we know what we are doing.

The thing is we have a simple policy about including gold in the portfolio – we include it if the client wants to and asks for it, and we don’t if they do not ask for it. That is, if the client wants gold in their portfolio for whatever reason, we do not question the logic or try to advice him out of it. We do ensure that the metal does not form more than 20% of their portfolio, but that’s it. On the other hand, if the client does not mention it, we don’t pro-actively include gold in any SIP portfolio that we create.

The reason for this is that we do not have a firm opinion on gold on way or the other. The thing about gold mutual fund is that it is unlike any other mutual fund. A main purpose of investing in mutual funds is to be able to reach a diversified set of assets through the intelligence and judgement of an astute fund manager. In the case of gold, it is the most singularly undiversified mutual fund that there is – it holds one single asset, that’s it. And it requires no management skills or the judgement of a fund manager. Other than the fact that a gold mutual fund is also a mutual fund, there is really no similarity between it and the wide world of the rest of the mutual funds.

So, recommending to invest or not invest in gold is little more than advising on a single stock. Only harder. With a single company you can look at its balance sheet, stock chart, valuation ratios etc. and come to a reasonable, defensible conclusion. With gold, you would need to look at the entire global economic climate, currency valuations, political scenarios and such other macro imponderables before arriving at an opinion that could very well be completely wrong.

At the same time, given the almost relentless climb in gold prices over the last couple of years, it is hard to argue that an investor should not invest in it for some part of their portfolio. It is somewhat like the real-estate scenario in India – we keep watching the prices go up and up and keep arguing that the market is over valued, but people making money off that market continue to do so defying our skepticism.

So, our opinion on gold is neutral – you want it, you got it, and we’ll rework your portfolio to make room for it, if needed. There are some good gold mutual funds from Quantum, Reliance, Kotak, SBI, Birla, and ICICI that we’ll happily let you choose from.

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