Should I continue SIP in Gold Funds or Stop?

Due to negative returns on Gold Funds of Mutual Funds, many investors are asking this question whether to continue SIP in Gold Funds or otherwise. Today, 25 Gold Scheme including ETF, are available in the market. Out of these 25 Gold Schemes, more than 50% schemes, i.e. 14 schemes were launched in the year 2010 and 2011. Reason is obvious that prices of gold were on rise in these years. Ironically, most of the Mutual Funds launch their NFOs when the prices and sentiments are high. (Separate topic of discussion you see..!).

Many investors invested in these gold schemes either lumpsum or through SIP. However, due to downward rates of gold in the past two years, NAVs (Net Asset Values) of these schemes are losing. Therefore, investors have notional loss in these schemes. (Remember that by redemption, you will convert this notional loss into actual). Lumpsum investors have notional loss of around 12% and SIP holders around 7%.

SBI Gold Fund launched in September 2011 with Rs 10, is down today to Rs 8.83 as on 2nd December 2014. HDFC Gold Fund NFO launched in October 2011 at Rs 10 is also down to Rs 9.08 as on 2nd December 2014. Therefore, majority of investors are worried whether to continue their future SIP installments. Answer to this is actually simple. If you are otherwise comfortable to continue but worried only because rates are going down then it is better to continue with SIP.

Try to understand that, benefit of SIP will actually come only in down market. You will get more number of units when NAV is down which will help you to average out the risk.
Let us see real example. Suppose, Anil and Sunil have started SIP of Rs 1000 in November 2007 in Birla Sun Life Top 100 scheme. Sentiments were high and Sensex was at pick, 21000. Most retail investors attracted to this level because so called share market analysts were predicting Sensex to touch even 50,000. (Usual mistake). But, due to subprime effect, equity markets world over crashed. Our Sensex crashed to 8600 in January 2009. (So called market analysts now predicted it to go down to 5000). Anil was worried about this analysis and he stopped SIP and redeemed his investment with loss of 43%. But, Sunil, who was prudent, patient and long term investor, decided to continue SIP even in down trend of the market. Today, Sunil is sitting on CAGR returns of 21%. Now, compare loss of 43% to Anil verses profit of 21% to Sunil, and you will agree with benefits of SIP in the long term period.

Now, let us try to examine reasons of volatility in prices of gold. Prices of gold depends on various factors such as Dollar value (Strong or weak), Inflation, Crude Oil prices world over, Political stability in various countries, Economic situation in developed countries like US and UK etc. Today in most of the countries, gold is not considered as standard for printing currency notes. Most of the things are beyond control of common investors. So, let us consider and examine things which are within our control. e.g. ideal portion of gold can be around 5% to 7% of the total portfolio. Gold can be looked as insurance. When all asset classes will crash, gold will give you profit. Focus of investors should be on right mix of assets i.e. asset allocation and diversification. I would say, instead of questioning continuation of SIP, if investors try to get answers for bigger questions like financial planning and asset allocation, then, the life will become much simpler.

- Suhas Rajderkar
CEO, Monetonic Financial Services Pvt Ltd.