RETAIL investors should consider gold as part of their investment portfolio, as the yellow metal as an asset class has given a return of 23 per cent in 2010 compared with 18 per cent return from the equity markets, a Crisil study said.
The yellow metal also remains an effective hedge against other investments during times of economic stability, and has significantly lower correlation to other assets like equity, debt and other commodities, the study said.
The benefit of low correlation with other asset classes makes gold a useful asset for diversification and asset allocation. Further, while almost all asset classes depict cyclical movements, gold has consistently provided healthy returns.
Also, gold has a positive correlation with inflation and can be considered as a good hedge against inflation.
Adjusted for inflation, gold has yielded positive returns over the last three years.
The study indicates growing investor interest in the gold exchange traded funds (ETFs), with the count of retail folios growing by almost four times to 0.24 million as of September 2010 compared with just 63,000 folios as of March 2009.
Gold ETFs provide various benefits over holding physical gold including smaller lot size, guaranteed purity, demat issuance, liquidity and price transparency as well as tax advantages.
However, while investing in a gold ETF, investors need to understand the risks involved such as tracking error and impact cost.
(Tracking error is an estimate of the gold ETF's ability to track the domestic gold prices as accurately as possible whereas impact cost is a measure of the volume of ETFs traded on the exchange.) According to Crisil, gold ETFs will see higher inflows in the coming months, and more mutual funds are likely to add gold ETFs to their bouquet of offerings.
At 23 per cent, gold ETFs have yielded the highest annualised returns among any mutual fund category over the last 3 years ended December 31, 2010.
