Is it time to exit gold & real estate?

Tue, 25 Mar Pre-Open

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Of late, macroeconomic indicators have showed signs of improvement. The current account deficit improved to 0.9% of GDP during December 2013 while headline wholesale price index (WPI) inflation too showed signs of receding. The finance minister is also expected to more or less contain the fiscal deficit within 4.8% of GDP in FY14.

Improving economic signs coupled with strong financial inflows has seen Indian stock markets scale an all time high of about 22,000 recently. This has reignited investor interest towards equities, which in the past few years was at an all time low amidst slowing growth, policy flip flops and inflationary concerns. In such a fragile economic environment, most investors sought safety in other physical assets like gold and real estate rather than paper assets like equity and debt.

However, with equity markets scaling new highs and economic conditions improving, is it time to exit physical assets and seek higher return in equities?

Though it appears compelling we believe such a strategy of chasing fads can prove to be costly for investors. Rebalancing one's entire asset allocation which is of long term in nature based on short term economic influences is a recipe for disaster. In fact, more than economic conditions, individual circumstances should determine an ideal asset allocation. In other words, exposure to equities, debt and other physical assets should depend upon an individual's risk appetite and return considerations. And not solely on expectations over how a particular asset class will perform.

Also, as far as allocation to gold is concerned, we have always reiterated our stand of having at least 5% of one's portfolio in this asset class. Gold is an insurance against inflation and cheap monetary policies of the western world. Hence, it is a must have asset class, though in small proportion. However, considering the complexities (liquidity, transaction cost, tax issues etc) involved in real estate investing, investors should be careful before switching in or out of this asset class. Exposure, if any, should be made from a long term perspective.

The bottom line is that each asset class reacts differently to economic situations. And proper asset allocation is a key to long term success. Allocating money without proper asset allocation guideline in place can lead to sub optimal results in the long run.