Is This Time To Buy More Gold Or Look At Other Options?

In an interview to CNBC-TV18, personal finance expert, Hemant Rustagi of Wiseinvest Advisors shared views on whether one should increase allocation in gold now, maintain status quo or consider other investment options.

Below is the verbatim transcript of Rustagi's interview with CNBC-TV18.

Q: With gold prices cracking, should investors be increasing their allocation to gold or maintaining status quo. Would you advice people to buy gold from the day’s low today also a bit of recovery is seen or would you say there are other lucrative options like Public Provident Fund (PPF) or even bank fixed deposit (FD) given that inflation has now come down?

A: As gold prices have crashed investors are worried a lot because they are wondering what to do. There are mix reactions coming from investors. On one hand investors who are not very sure as to what to do with their existing investment in gold and on the other hand there are investors who are wondering whether this a great opportunity for them to make a quick buck.

I think the key factor that investors need to consider at this point of time is that the reason for which they have been investing in gold and the reason for which they want to invest in gold at the current level.

I think gold has an important role to play as far as any investor portfolio is concerned from the asset allocation point of view because it not only has negative correlation with other asset classes, but also allows investor to take it as a hedge against inflation over a period of time.

Therefore, it is very important for investor to look at reasons for which they have been investing in gold; in fact there are investors who have gold in their portfolio, to accumulate it for a special occasion in their life, their children marriage.

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So, my view is that any investor who has been investing in gold in a disciplined manner over a period of time with defined time horizon and goal, they can continue to hold on to the investment and also continue investing because they can then benefit from averaging.

However, as far investors who are looking at this as a great opportunity to make a quick buck, need to remember that making any ad hoc decision based on the recent, past performance of any asset class including gold can backfire because gold prices can correct even from these levels and the recovery may not happen soon. Therefore, all those investors who invested in gold in the last one-two years trying to benefit from the price momentum in gold need to prune their exposure to gold and look elsewhere.

There are opportunities in the debt segment. One has seen that the inflation has fallen below 6 percent so one is going to see some more rate cuts. Hence there is an opportunity for investor to benefit from inverse relationship between bond prices and interest rates by investing in income funds or mutual funds with a time horizon of 18-24 months.

On the traditional investment option front the interest rate has already been lowered fractionally. If one looks at small saving schemes for example public provident fund, it currently offers 8.7 percent as against 8.8 percent and the senior citizen scheme offers 9.2 percent as against 9.3 percent, but investors can invest at these rates till March 31, 2014. For those investors who are on the lower tax bracket looking to invest in FDs, one has not seen significant reduction in interest rate so they still have an opportunity to lock in before the prices fall. So, there are opportunities elsewhere.

However, as far as gold portfolio is concerned the key factor is to consider the reason why one has been investing in gold and if one has been investing with defined time horizon and objective then my suggestion would be to hold on and continue investing in that.    

Caller Q: I am willing to invest Rs 2,000-3,000 per month beyond the investments I already hold. Please guide me as to whether my portfolio is fine or should I re-allocate my funds from one plan to another and terminate a few. My plans are – HDFC Top 200 Tax Saver, Franklin India Bluechip Fund, DSP BlackRock Top 100 Equity Fund, HDFC Equity Fund as well as HDFC Prudence Fund, Reliance Diversified Power Sector Fund, Reliance Regular Savings Fund,Reliance Regular Savings Fund-Equity Plan.

A: The key factor to consider here is the time horizon. Assuming that you are investing for long-term, you can invest in another fund that could be a quality midcap fund because your portfolio currently is dominated by largecap or largecap oriented funds. Therefore, you can look at a fund like IDFC Premier Equity Fund, which has been doing well.

However, you need to consolidate your portfolio; you have a sector fund like Reliance Diversified Power Sector Fund and also Reliance Regular Savings Fund. So, sometime you need to create the right balance in your portfolio, not because some of the funds are not doing well, but also to create right balance in terms of allocation to different segments of the market.

Therefore, I would recommend switching your holdings in Reliance Diversified Power Sector Fund and Reliance Regular Savings Fund into Reliance Equity Opportunity. However, you also have very similar looking fund like DSP Blackrock Top 100 Equity Fund and Franklin India Bluechip Fund; you can exit from these two and invest that money into HDFC Top 200 Fund.

So, by doing this you will create the right balance in terms of allocation to different market segments and also you will have right kind of funds, which can enhance your portfolio performance over time.