Investing in Gold and Silver ETFs: Are they as risky as Equity Funds?

Ans: Gold has been a preferred investment for generations. It’s often seen as a “safe haven” during economic uncertainty. People in India have a cultural connection with gold, holding it as a symbol of wealth and security. However, when you look at gold from a long-term wealth-building perspective, it may not deliver the returns you need.

For instance, if you had invested Rs 1,00,000 in gold in 2011, by 2024, that investment would have grown to Rs 2,73,687. That’s an absolute return of 173.69%, with a Compound Annual Growth Rate (CAGR) of 8.05%. While this might sound decent, there are other investment options that have delivered far higher returns during the same period.

Comparing Gold with Equity Investments
Now, let’s compare the returns from gold with equity investments like the NIFTY 50 TRI.

Gold Investment: Rs 1,00,000 invested in gold in 2011 would have grown to Rs 2,73,687 by 2024. The CAGR was 8.05%, providing an absolute return of 173.69%.

NIFTY 50 TRI Investment: Rs 1,00,000 invested in the NIFTY 50 TRI in 2011 would have grown to Rs 6,24,124 by 2024. The CAGR was 15.11%, resulting in an absolute return of 524.12%.

This comparison shows that equity investments, particularly those in the NIFTY 50 TRI, far outperformed gold over the same period. While gold has its place as a safety asset, it does not offer the same potential for wealth creation as equity over the long term.

Risk and Returns in Gold and Silver ETFs
Gold and Silver ETFs (Exchange Traded Funds) are investments that track the price of these precious metals. While they offer liquidity and ease of trading, they do not provide the kind of returns that equities or equity mutual funds do.

Gold ETFs: They are subject to the fluctuations in the price of gold. Historically, gold prices have shown moderate growth. The returns are often lower than equities, and gold tends to act more as a store of value rather than a wealth generator.

Silver ETFs: Silver is even more volatile than gold. Silver prices are influenced by both industrial demand and speculative trading, making it a riskier asset compared to gold. Its price movements are often erratic, and its long-term returns are less predictable.

Gold and silver ETFs are seen as safer than direct equity investments but come with a lower growth potential. This is why financial planners usually do not recommend them as the primary component of a long-term wealth-building portfolio.

Why Gold and Silver ETFs Are Not Frequently Recommended
Lower Long-Term Growth: As seen in the comparison with NIFTY 50 TRI, gold and silver do not generate the kind of returns that equity investments can provide. If you are looking for long-term wealth creation, equity mutual funds tend to offer better results.

High Volatility in Silver: While gold is often seen as stable, silver is far more volatile. Its price can swing wildly due to industrial demand, making it a high-risk investment in comparison to other asset classes.

Diversification Limits: While it’s important to diversify your portfolio, too much exposure to gold or silver ETFs can limit your overall growth. These assets are not growth-oriented, and a portfolio overly reliant on them may miss out on better opportunities in equity markets.

Role of Gold and Silver in a Portfolio
That said, holding some gold in your portfolio can be beneficial, particularly for stability during economic uncertainty.

Portfolio Stabilizer: Gold often acts as a hedge against inflation and currency fluctuations. During periods of economic downturn, gold prices tend to rise as investors flock to safety.

Safe Haven: Gold’s appeal lies in its reputation as a “safe haven” investment. When markets are turbulent, gold can provide stability. However, this is more about preserving value than growing wealth.

Recommended Allocation: It’s generally advised to allocate 5% to 10% of your portfolio to gold. This provides a balance between safety and growth. A small allocation can help reduce overall portfolio risk, but it shouldn’t dominate your investments.

Equity Mutual Funds vs. Gold for Long-Term Goals
Equity Mutual Funds for Wealth Creation: Mutual Fund SIPs (Systematic Investment Plans) offer a disciplined way to invest small amounts regularly in the equity market. Over time, this strategy helps in rupee cost averaging and takes advantage of market volatility. The long-term potential for growth in equities is far superior to that of gold.

The Power of Compounding: The real strength of equity mutual funds comes from compounding. Staying invested for the long term allows you to benefit from the exponential growth of your investments. Gold, while stable, does not provide the same compounding effect.

Mutual Funds vs. ETFs: Actively managed mutual funds offer professional expertise in selecting and managing a diversified portfolio of equities. This active management can often generate better returns than passively managed ETFs. Investing through a Certified Financial Planner ensures that your portfolio is tailored to your risk tolerance and financial goals.

Higher Returns Over Time: As shown in the earlier comparison, equity investments, particularly through SIPs, have the potential to generate significantly higher returns than gold. A Rs 1,00,000 investment in the NIFTY 50 TRI in 2011 would have grown to Rs 6,24,124 by 2024. This kind of growth is not achievable with gold or silver investments.

Should You Hold Gold or Silver in Your Portfolio?
While equity mutual funds should form the core of your portfolio, gold can play a supportive role. Here’s how you can approach it:

Small Allocation: Keep gold as a small part of your portfolio (5% to 10%). This helps diversify your investments and provides a buffer during market downturns.

Focus on Wealth Creation: If your primary goal is long-term wealth creation, equity mutual funds should be your priority. They offer higher growth potential and can help you achieve your financial goals faster.

Gold for Stability: Gold can act as a hedge during periods of economic uncertainty. However, it should not be relied on for wealth generation.

Avoid Over-Reliance on Precious Metals: Too much exposure to gold or silver can limit your portfolio’s growth. They are primarily preservation assets, not growth assets. Therefore, maintain a balanced approach and prioritize equity for wealth creation.

Final Insights
Gold has been a favorite investment for generations, but when it comes to long-term wealth building, it doesn’t deliver the returns that equity mutual funds can provide. While gold and silver ETFs offer safety and liquidity, their growth potential is limited compared to equity investments.

For a balanced portfolio, holding 5% to 10% in gold can provide stability. However, if your goal is wealth creation, equity mutual funds, especially through SIPs, should form the majority of your investments. These funds have historically outperformed gold and silver, offering the potential for significantly higher returns over the long term.

It’s important to maintain a diversified portfolio, but the focus should be on growth assets like equity, which can help you achieve your financial goals faster and more efficiently.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment