Gold and silver funds were among the best performers in 2022. They continue to perform well even in the new year. In the last one month, both the categories have beaten all other mutual fund categories and maintained their top spots. Gold funds have offered 5.15% in one month and 13.54% returns in the last three months. On the other hand, silver funds have offered 4.01% returns in one month and 23.92% returns in three months. Should you invest in them?
There are a total 24 schemes investing in gold at the moment. Silver funds are a new entrant to the mutual fund market. There are 12 schemes in the category, including ETFs and FOFs.
First, let’s look at what is driving these returns? International gold prices have been on an uptrend since November amid moderating US CPI numbers and anticipation of a less aggressive Federal Reserve. The US dollar as well as US yields have begun to cool off which have been supporting gold. According to experts, secondary factors weighing on prices have led to robust gold buying by global central banks and there is a potential positive impact on gold demand because of the opening up of Chinese markets.
According to ICICI Direct, an online trading platform, Silver might outperform gold this year as the silver market is likely to remain in deficit for a second consecutive year. A report by ICICI Direct says that silver’s demand in the industrial sector is likely to rise amid commitments to green infrastructure and electrification of vehicles. Apart from this, investment demand is likely to continue amid recessionary fears. Silver prices may rally till Rs 80,000 on MCX and $30 on international markets this year, says the report.
“Market direction this year depends on the trajectory of inflation, growth and central bank policy. Much of that remains unpredictable. As such, a strategic allocation to gold can help investors diversify their portfolio against market volatility, which seems a given in 2023. On the returns front, a deep recession, stagflation or a full dovish pivot by central banks would likely have major positive implications for gold prices,” says Gazal Jain, Fund Manager, Alternative Investments, Quantum AMC.
Mutual fund managers and advisors have always maintained that gold and silver should only be used as a diversification or hedge to your overall portfolio. Even though the outlook for both the asset classes is positive, experts believe that the allocation to commodities should be restricted to 10%. “Gold and silver have recently shown outstanding returns, with silver in particular providing high double-digit returns since it tends to outperform gold during such rallies. Both precious metals have performed well in the face of a weaker USD and concerns of a worldwide recession. Both metals may continue to perform well, and investors might add them to their portfolios in small amounts,” says Niranjan Avasthi, Head – Product, Marketing and Digital Business, Edelweiss AMC.
For investors looking to start their investments in these funds, the advice is to not expect high returns year on year. Fund managers say that repeating great performance year on year is not possible for mutual funds or any asset class so investors need to lower their return expectations from gold and silver funds and use these schemes only as a hedge. The schemes might do well in 2023 but that should not be your reason to join the party.