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Gold as stormed to the top of asset tables over the past year with a 22% return. As fears over corona virusescalate, the price of the precious metal has surged by 4% over the past month. However the metal has been volatile. After crossing ₹30,000 rupees per gram in 2012, it stayed relatively flat for nearly 7 years. Interest in it dipped further as equity markets rose after Narendra Modi's historic election victory in 2014. So should you have any gold in your portfolio and does it increase your returns? Note that there are many ways to invest in gold, including physical gold, mutual funds investing in gold and Sovereign Gold Bonds issued by the Government of India. All of these instruments track the price of gold.

Data over the past 30 years crunched by Kuvera, a mutual funds investing platform compared a portfolio with 100% equity against portfolio with equity-gold splits of 90:10, 80:20, 70:30 and 50:50. Kuvera used the Nifty 50 as a proxy for its equity returns and the price of gold per gram in India (Rupees). Average annualized returns over this vast time period showed that a 100% equity portfolio delivered the highest return. This portfolio gave an average annualized return of 16.8%. The portfolio variants with increasing gold allocation correspondingly delivered lower and lower average annualized returns. These went from 16.2% in the 90:10 split to just 14% in the 50:50 split.

However at the same time the volatility of the portfolio, also fell as the proportion of gold was increased. This volatility is measured by a unit called ‘standard deviation’ and this number dropped from 27% in the all equity portfolio to just 16% in the 50:50 equity to gold portfolio. This is because gold has a relatively low correlation with equity. A low correlation means that the two assets do not move in lock step. One tends to do well when the other does badly. Kuvera placed the correlation between the two at just 0.25.

“Gold should be 5-10% of an investor’s portfolio. Its low correlation with equity tends to reduce portfolio volatility. It is also a good hedge against inflation. In the last two quarters, as inflation surged, the price of gold also shot up," said Amol Joshi, founder, Plan Rupee Investment Services. Gaurav Rastogi, CEO, Kuvera oncurred. “Gold has a low to negative correlation with equity especially during wars, market crashes and disasters. This makes gold an effective portfolio diversifier. That gold denominated in Indian rupees has also returned about 11% CAGR over the past 30 years is just icing on the cake," said Rastogi. Thus, over the long term, while gold may not increase your return, some gold allocation in the portfolio tends to cut your risk.