“Gold and international funds are the two basic diversifiers for mutual fund investors. Diversification is achieved over a long-term. Gold funds have proved their worth in various cycles when the global equities have dipped,” says Vivekh Pathak, Founder, Finance & you, a Gurgaon-based wealth management firm. .
The international mutual fund category has offered 18.85% returns in one year, 10.02% returns in three years, and 7.45% returns in 5 years. Similarly, gold funds have offered 22.46% returns in one year, 9.68% returns in three years, and 5.98% in five years. However, these schemes have gone through many ups and downs in different calendar years.
For example, gold funds offered -8.29% returns in 2015, -4.20% in 2014 and -10.78% in 2013. International funds went through a bad phase in 2018 and 2015, when they posed -5.54% and -6.15% respectively.
Many financial planners and mutual fund advisors point out this data to underscore the point that these schemes are not meant for common investors. They say these schemes are meant for sophisticated investors who want to use these tools to diversify their portfolio. "Firstly, investors need to stop expecting returns from these schemes on an annual basis" warns Vivek Pathak, who believes that investors should also be mindful about their risk profile and return expectations while investing in these schemes.
“International funds are only for aggressive equity investors. Many investors make the mistake of investing in international funds for their short-term returns. These funds have the potential to give high returns but they also possess a lot of risk and volatility. Also, direct investors shouldn’t take this leap unless they are familiar with the international markets,” says Vivekh Pathak.
“Gold is the best diversifier for retail investors. Many Indian investors buy gold as a long-term goal. So, investing in gold funds via SIPs serves that purpose also. It also gives you a cushion in times of uncertainty and volatility. Gold is an asset which rises when there are issues in the international economy. In these conditions, your equity markets are generally in a bad spot,” say Neeraj Chauhan, CEO, The Financial Mall, a wealth management firm, based in Delhi.
“There are other sectors that work opposite to our markets but all of those might not be good diversifiers. For example, pharma sector is dependent on the rules and regulation the government makes. We have seen pharma going down quite a bit in the last couple of years. Essentially pharma is a sector fund and is thus risky. Similarly, international funds are risky but they follow a bigger and better index (except those which are commodity and emerging market focused),” says Neeraj Chauhan.
If you are convinced about the efficacy of these `diversifiers,' you may consider allocating a small part of your portfolio to them. However, you should do this only if you have a sizeable portfolio, say mutual fund advisors. If you diversify too much to reduce the overall risk in a modest-sized portfolio, you would water down the total returns, warn advisors.
“Don’t expect high returns from diversifiers. They just need to protect the downside. We always suggest having maximum 10-20% allocation to diversify your assets and rest of the money should chase returns. If your 10% in gold funds doesn’t fall much in a long period, say 10 years, it will be really positive for your portfolio. Proving stable returns over a long period and going up when you lose returns in market volatility is what diversification aims,” says Puneet Oberoi, Founder, Excellent Investment Advisorz, a wealth management firm based in Delhi.
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