MUMBAI (Commodity Online): Today is Akshaya Tritiya, one of the golden days for gold in India. Though gold has been one of the integral parts of Indian household and despite India being the largest consumer of the yellow metal in the world, two short comings have hampered the real growth of this shining metal.
One is that India has not been a price fixer and has been a follower in spite of its strength in consumption. A solace to this is the fact that India cannot help itself in fixing this. The other dampener is the ban on PMS in commodities.
According to Religare research 'commodity like gold should be encouraged in the investment portfolio to optimize the duration of portfolio for asset immunization in case of adverse market movements and also to compensate for decreasing purchasing power in this inflationary periods.'
Unfounded fears and regulatory apprehensions have kept PMS or Portfolio Management Services out of the commodity ambit. Religare further states that 'high return of any investment is always associated with high risk. Therefore it is a diversification of investment portfolio which enables investors to maximize their return with minimum risk. Portfolio diversification is distributing one's wealth into different asset classes like cash, debt, equity, property, gold, art and so on.
These asset classes, the research further states, have a certain return expectation and risk attached to it, except debts which bestow modest returns. In a well diversified portfolio, the risk among different asset classes offset each other, hence returns of portfolio remains protected.
There arrives a need for allocating your asset classes in such a ratio that can provide best possible return. Asset classes having different (preferably negative) correlation are invested together to maximize returns and minimize risk. So far, portfolio typically contained only three asset classes - stocks, bonds and cash and was considered to be adequately diversified by investors.
Religare research further states that during the recent economic downturn due to frequent adverse movements in several asset classes, investors started searching for alternate strategies to achieve more effective diversification in their portfolios by incorporating new asset classes such as commodities. Among commodities, gold has shown stellar returns over recent years. Hence it can be considered as the most valuable contribution to a portfolio for diversification, since it is found to be negatively correlated with most other asset classes. In India, possessing gold has been a mark of prestige.
In addition to having cultural and aesthetic value, it considered as an important asset for investors to diversify their portfolio. It has become convenient for investors to include gold in their portfolios, since the launch of gold ETF by exchanges. Gold acts as a liquid emergency fund in the portfolio. Gold also acts as a hedge against inflation. In the long term outlook, the gold prices will remain high in years to come, as rise in demand for this precious metal is expected to continue due to demand level rising in India and China and supply being still scanty due to declining mines production and unavailability of new mines.
The mean return of last five year gold prices is found to be around 19% with volatility of 11%, which in comparison to other asset class returns, is more consistent. The portfolio with only 20% gold reduced volatility from 9 to 7% with slight increase in return.