Gold as an investment performs reasonably well on three major factors namely safety, liquidity and returns. It provides a hedge against inflation.
Lovaii Navlakhi of International Money Matters recommends that upto 5-7 percent of the portfolio should be invested in gold and the best way to do this is through the ETF route.
In an interview to CNBC-TV18, Lovaii Navlakhi, International Money Matters shared his views on what should retail investors do with gold now after government hiked import duty on gold to 10 percent to arrest the declining value of rupee and contain the fiscal deficit to 3.7 percent of the GDP.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: The government is coming down heavily on curbing the appetite for gold, what does this mean for the retail investor, what should he do with his investments? Should he branch out to gold, should he branch out of gold?
A: Gold needs to be a part of every investor’s portfolio. We normally recommend that up to 5-7 percent of the portfolio should be invested in gold. During uncertain times you can enhance that allocation to 10-15 percent. Therefore, the best way to invest in gold is going through an exchange traded fund (ETF) route.
You need a Demat account, you can buy the units of gold based on number of grams and their rate. But the real issue is when people look at the past performance of any investment, any asset class and decide to put in bulk money. So anyone who has invested prior to April or early April this year will be staring at losses at this point in time.
You should look at strict asset allocation and if you have invested 5 percent in gold, the value of gold has gone up 20 percent so your allocation to gold has increased marginally. You take out the profits every three-six months and that way you will ensure that you are within the asset allocation.
For people who have put a large chunk of their money in gold, at this point in time the thought should be how do I reduce it from 20-25 percent of my portfolio to 10 percent? They should have three-six months’ time window and in a staggered manner they will gradually reduce this allocation to gold so that they are within the asset allocation norms. Very much like an SIP, how you invest gradually, divestment also could be done gradually.
Overall, gold is a hedge against inflation and if you are expecting growth to come back in markets globally then it may not be the asset class that will outperform but it still needs to be there as part of the asset allocation.
A: He has invested a variety of funds, there are couple of large cap funds, a multi cap fund and a midcap fund. So he has created a decent portfolio. I am assuming they are equally allocated.
If one was to look at performance then Reliance Vision Fund has underperformed in the last five years. It has gone only by about 13-14 percent in the last five years whereas all the other three funds have gone up by about 50 percent. So, Reliance Vision Fund is something that he should consider exiting.
Among the three schemes, DSP Small & Midcap is a midcap scheme, whereas HDFC Top 200 and HDFC Equity are large cap oriented. In the last five years they have shown equal performance. But the difference is stark in the past one year as well as three years.
While large caps have done okay, they have been flat in the last three years or so, the CNX Midcap index has fallen by 7 percent per annum. So he has to keep in mind that midcaps would typically take a longer period to perform especially if you have entered there in bad times. But it doesn’t mean that he shouldn’t have an allocation to midcaps.
If I look at specific schemes in each of these three categories, there are better schemes available. So for an HDFC Top 200 may be he can replace with Birla SL Frontline Equity . With HDFC Equity he can replace ICICI Pru Dynamic Plan . He can replace DSP midcap with ICICI Discovery. It is important to look at exit loads and capital gains impact so he should keep that in mind before he does that. He should not take out and put all the money into new fund simultaneously. Best if he has a financial advisor and if he doesn’t have one he should get one.