Mutual Funds are witnessing record inflows even as the Sensex is still some distance away from hitting a record peak. In June 2015, mutual funds saw a net inflow of Rs 12,273 crores, which was the second highest since Jan 2008.
Investors in gold over the last two to three years have been a disappointed lot as gold prices in India have given negative returns. From levels of Rs 31,000 gold is down to Rs 24,000-Rs 25,000 levels.
Frustrated individuals are asking whether it is time to move from gold to mutual funds. The answer may not necessarily be "yes".
Use gold as hedge
Equity markets and gold tend to move in opposite directions. Now, by investing in mutual funds which are equity linked you are taking a risk simply because the Indian markets have given 27 per cent returns since the Modi government took charge. So, by investing in mutual funds you are taking exposure to schemes at high net asset values because the markets has rallied substantially.
On the other hand gold has fallen and to move from gold to mutual funds at this stage would defy one straight forward principle of "buying when prices are low and selling when prices are high".
So, you would not want to sell gold at lower rates and push money into equities at high rates, no matter what people say. In fact, you should hold onto gold as a hedge against any risk that equity markets could be subject to.
The ideal situation would be to balance your portfolio. Do not sell when prices have fallen and chase something when prices have gone high.
Gold prices may not fall too much
The one reason why gold prices have fallen is on account of the possibility of a hike in interest rates by the US Federal Reserve. Now, even if the US Federal Reserve does raise interest rates in the month of Sept, we might not see too much of a downside in gold, because the same has been factored in.
And, if it does raise interest rate it might also lead to a fall in share prices and hence net asset value of mutual funds as well.
So, as mentioned earlier gold prices may not fall too much from here as they have already fallen quite a bit. No point in selling gold at lower prices and buying mutual funds schemes.
Wait for mutual fund net asset values to fall, if you want to invest in the same.