I hope you bought gold - and lost money! - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
I hope you bought gold - and lost money! A  A  A
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10 DECEMBER 2014

At the end of every proclamation of The Honest Truth is an innocent table. The table is a starting point for what one should do with one's savings and where one should invest it.

My bias towards Quantum Mutual Fund products is obvious: I am a Director of the entities that created it. Take away my bias and substitute Quantum Mutual Fund for any other fund house (at your risk!☺) and the allocation story will not change much. Sure, your level of risk, your age and stage of life will tweak some stuff around a bit but I use this table more as a "base case: from which you can add and subtract to get to your preferred level of risk. If you have chosen well, the returns you expect for the risk taken should follow.


Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"12/10/2014


But there is another bias that is also well known and placed squarely in the table above: my view that investors must own gold.

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Yes, gold: that dull asset class which has done so badly the past one year compared to the BSE-30 Index that one cries and moans about what a terrible "investment" it has been.

Step back and look at the overall picture.

Let's start with the base case in the table above.

Assume expenditures are Rs 1 lakh per month but there is a salary or earnings to support that.
Assume the savings pool is Rs 50 lakhs in total.
And assume that you wish to be very safe and keep 24 months expenditure (Rs 24 lakhs) in a relatively safe and easy-to-withdraw place (a Liquid Fund). This is your buffer in case the world or India collapses, you lose your job, your business is down, etc., etc. - and you need time to adjust your lifestyle to the new reality.

Based on the above, your allocation as of September 2013 and the returns over the past 14 months would have been:

Allocations made Amounts Return Approximate Gain/(Loss)
Starting Pool Rs 50 lakh    
Liquid Fund Rs 24 lakh +8% Rs 1.9 lakh
Balance for other investments Rs 26 lakh    
Equity Funds, in general 80% of Rs 26 lakh = Rs 20.8 lakh + 40% Rs 8.3 lakh
Gold 20% of Rs 26 lakh = Rs 5.2 lakh -15% (Rs 0.8 lakh)
Totals Rs 50 lakh 18.9% Rs 9.5 lakh

Yes, gold looks terrible. You "lost" Rs 0.8 lakh by investing in what Warren Buffet has called a useless and unproductive asset.

Taking a different time period
But, since I gave you the advantage of investing in equity at one of the "lowest" points in September 2013, thereby insuring that your investments in equity would make you a lot of money, let's see what gold would have done since January 2008. That was the peak level of the Index at the height of the BRIC mania and, at a more local level, when the Dream Team (does anyone even remember who they were?) was about to take India to a higher growth orbit for a decade or two. Well that story ended pretty poorly - and investors in dull gold and boring liquid funds would have done far better than the revved up investors in equity.

Based on the same profile as above, your allocation as of January 2008 and your returns over the past nearly 7 years would have been:

Allocations made Amounts Return Gain/(Loss)
Starting Pool Rs 50 lakh    
Liquid Fund (24 months expenses) Rs 24 lakh +68% Rs 16.3 lakh
Balance for other investments Rs 26 lakh    
Equity Funds, in general 80% of Rs 26 lakh = Rs 21 lakh + 25% Rs 5.2 lakh
Gold 20% of Rs 26 lakh = Rs 5 lakh +225% Rs 6.5 lakh
Totals Rs 50 lakh +56% Rs 28.0 lakh

The point of these above 2 tables is:
  1. Returns can vary across asset classes over different time periods,
  2. Every asset class has a role to play,
  3. You need to match the characteristics of the asset class with what you need.
And I will end with what I have said many times at Path to Profit talks and on webinars: "Buy Gold, and then pray that it goes down and you lose money. Pray that gold collapses by 50% the day after you buy it".

Gold is insurance.

When the world is in a bad shape - gold does well and offsets some of the losses or (lower gains) from the more flamboyant asset classes like equity. Note how gold gave a higher return than equity since January 2008.

When the world does well, gold will not do well. Equities will do far better. But you will have invested most of your excess savings in equity so that will make you happy. Gold will be a drag. It is supposed to do badly when people are cheerful and optimistic!

Do you buy a life insurance policy then hope to die?
No, you want to live.
Gold is that life insurance policy which you don't really want to see doing well.
If gold does well, it means the majority of your investments (which is in equity) are doing poorly.

But, just in case....just in case a brick is about to fall on your portfolio and the world economy is about to slip, or India is about to Modi-fy its expectations of the Modi government, you have your insurance. You have your gold.

Equities - whether in a Quantum equity Mutual Fund or in any other equity mutual fund or buying stocks directly by using the research on Equitymaster - is a great place to be in the long run.
And gold is a wonderful balance for the portfolio.
Don't lose sight of this fact.

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Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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4 Responses to "I hope you bought gold - and lost money!"
AKB
Apr 24, 2015
Looking forward to Ajit open his innings for 2015. Simple plain honest truth. Makes for interesting read. Ajit should post one article/ read EVERY month at least in The Honest Truth if NOT more. Thanks. Like 
Vijoo
Dec 18, 2014
Dear Ajit – firstly, thank you for your many insightful posts and views on economy and investments. I find it very interesting and standing out in the crowded ‘market of ideas’.

The biggest challenge with gold as an asset class, in my view, is not the ones which are generally spelt out in debates on this topic (example, it is not a productive asset, Mr. Buffet views it as unproductive, etc.). Let me outline a few assumptions I am making here before I outline the issue

Assumption 1: your readers are folks who are honest and wants to do the right thing and abide by rules and laws
Assumption 2: we live in a society which is under a democratic system of governance where people elect their representatives and have abdicated the power to make rules/laws to the elected government

Keeping the assumptions above in mind, the ‘insurance’ aspect of gold becomes uncertain as it can be tweaked, changed overnight by an act of the sovereign government that represents all of us. Governments can nationalize gold assets, increase taxes on returns from gold, etc., etc. (the list is limitless). All the while, the honest investor is left with no other option but to comply with the rules of the land (of course, one can sell physical gold for cash in gold shops, not report the sale and avoid taxation…which is not recommended )

In medieval times, one could have hoarded gold in personal warehouses guarded by a faithful private army, etc. to protect the ‘investment’ but we are left with no such option (neither do we desire to have that as an option).

In short, attractiveness of gold as an asset class is very much dependent on the policies framed by the government. I still think it is sensible to invest a portion of ones savings in gold but we have to keep in mind the power of government action that would, ultimately, determine returns from this investment.
Like (1)
DEEPAK KARNIK
Dec 14, 2014
sir, cant I get stability by merely increasing my allocation to liquid funds by the amt which I would have invested in gold as per your formula? Besides if I wish to protect against rupee depreciation ,I could invest some funds in one of the sevaral funds investing in foreign equity? MOST GRATEFUL FOR YOUR COMMENTS, SIR. Like (1)
Sharat
Dec 12, 2014
One thing you could possibly highlight is how the recommendation has worked out from ~2008/9 period when you launched the path to profit series. Clearly, it has done very well.. but it will establish the picture clearly. Like (1)
  
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