I’ve been reviewing long-term returns and noticed that gold has delivered a CAGR of around 14% in India over the past 10 and 20 years, outperforming most large-cap equity mutual funds. Interestingly, this comes with much lower volatility than what we usually see in equity markets.
Globally, gold’s CAGR has been closer to 9-10%, but India seems to benefit from the rupee’s depreciation and a high inflation environment, giving gold an extra edge. This makes me wonder: Are index equity funds even necessary in a portfolio when gold offers similar or better returns with lower risk?
I understand mid- and small-cap funds can outperform gold in some phases, but those come with higher risk too. Also, if one avoids buying gold as jewelry (to cut down on wastage and making charges) and opts for gold ETFs, digital gold, or coins, it seems like a cleaner, tax-efficient way to invest.
So, here’s my question:
Should I reduce my equity exposure and increase gold allocation in my portfolio, especially given its strong historical performance and lower risk profile? Or is there a strategic case for holding equity despite this?
Advice by Yash Sedani, Assistant Vice President, Investment Strategy at 1 Finance
Gold and equity serve very different roles in a portfolio. While gold is a hedge against inflation and offers tangible value with relatively lower volatility, equity provides long-term growth potential by offering exposure to the performance of businesses and the broader economy. Historically, gold and equities have had low or inverse correlation, meaning gold often performs well during periods of market stress, making it a valuable diversification tool.
However, gold does not generate income or represent ownership in a growing business. If you have a lower risk appetite, increasing gold allocation can help reduce portfolio volatility.
But relying solely on gold could limit your participation in economic expansion and wealth creation that equities can provide. It’s also important not to base investment decisions solely on recent performance. The surge in gold prices has been influenced by geopolitical tensions, currency depreciation, etc, factors that may not persist indefinitely. Past performance, especially in gold, is not a guarantee of future returns.
Gold vs Large-cap mutual funds
Gold mutual funds have outperformed large-cap equity funds over the past three years, offering higher returns during periods of economic uncertainty. However, gold funds can be more volatile and are influenced by global commodity prices. Large-cap equity funds, while offering slightly lower returns, provide exposure to established companies and potential for dividend income.
Fund Category Top 3-Year Annualized Returns
Gold Mutual Funds 20.51% – 19.79%
Large-Cap Equity Funds 17.86% – 14.80%
Gold Mutual Funds: These funds have delivered strong returns over the past three years, benefiting from global economic uncertainties and inflationary pressures. Notably, LIC MF Gold ETF FoF – Direct Plan – Growth achieved an impressive annualized return of 21.90%.
Large-Cap Equity Mutual Funds: While these funds have shown moderate performance, they still offer solid returns. Nippon India Large Cap Fund – Growth led the category with a 19.89% annualized return over three years.
Gold Mutual Funds (3-Year Performance)
| Fund Name | Annualized Return (3Y) | NAV (₹) | Expense Ratio | AUM (₹ Cr) | Risk Level |
|---|---|---|---|---|---|
| SBI Gold Fund – Regular Plan – Growth | 20.99% | 28.25 | 0.35% | 3,582 | High |
| LIC MF Gold ETF FoF – Direct Plan – Growth | 21.90% | 27.73 | 0.20% | 1,000 | High |
| Aditya Birla Sun Life Gold Fund – Regular Plan – Growth | 20.61% | 28.18 | 0.50% | 3,648 | High |
| Axis Gold Fund – Direct Plan – Growth | 20.88% | 30.77 | 0.17% | 944 | High |
Large-Cap Equity Mutual Funds (3-Year Performance)
| Fund Name | Annualized Return (3Y) | NAV (₹) | Expense Ratio | AUM (₹ Cr) | Risk Level |
|---|---|---|---|---|---|
| ICICI Prudential Bluechip Fund – Growth | 17.71% | 105.08 | 1.05% | 87,933 | Very High |
| Nippon India Large Cap Fund – Growth | 19.89% | 85.23 | 1.20% | 56,022 | Very High |
| Invesco India Largecap Fund – Growth | 15.50% | 65.29 | 0.80% | 1,329 | Very High |
| Canara Robeco Bluechip Equity Fund – Regular Plan – Growth | 15.07% | 69.60 | 0.80% | 14,965 | Very High |