Adding gold to NPS kitty will act as a hedge against inflation and moves inversely to equities
With the equity market turning volatile and government securities having a roller-coaster ride of late, gold has once again proved its safe-haven credential. As the precious metal increasingly becomes mainstream through progressive initiatives of the government, the World Gold Council is pitching gold as a permissible asset class in National Pension System (NPS) which is regulated by PFRDA.
Gold is a proven source of long-term returns, a diversifier that can mitigate losses in times of market stress, a liquid asset with no credit risk that has outperformed fiat currencies, and a means to enhance overall portfolio performance. However, gold investments are not permitted by pensions regulator PFRDA at present. It allows investments in equity, corporate bond, government debt and others like alternative investment funds (AIFs), real estate investment trusts (REITs) etc.
"Gold should be permitted as a mainstream asset class in National Pension Scheme (NPS) regulated by PFRDA as it has potential to enhance returns of a portfolio. Our research shows that expansion of wealth is one of the important drivers of gold demand over the long run. Gold's long-term returns have been comparable to stocks and higher than bonds and commodities," Somasundaram PR, managing director, India, World Gold Council told DNA Money.
In fact, a committee formed by PFRDA in the month of September 2014 under the chairmanship of G.N. Bajpai for review of investment guidelines for NPS schemes in private sector had in its report suggested introducing commodity trading viz bullion through Gold Exchange Traded Funds (ETFs) with ceilings of 1%. When asked about reservations against gold, PFRDA chairman Hemant Contractor did not completely rule out future investments in gold, saying: "We are not permitting investment in gold currently".
According to Somasundaram, analysis shows that adding 2%, 5% or 10% in gold over the past decade to the average US pension fund portfolio would have both increased returns and reduced volatility, resulting in higher risk-adjusted returns. "This learning would be relevant to Indian pension funds as well. Gold has outperformed all major fiat currencies over time and gold's correlation with stocks helps portfolio diversification in good and bad economic times," said Somasundaram.
In the Union budget of this year, finance minister Arun Jaitley had announced the government's intent to develop a comprehensive gold policy to treat gold as an asset class.
Experts agree that adding gold to NPS kitty will be an investor-friendly move. Neil Borate, personal finance analyst at Rupeeiq said, "Gold will enhance the attractiveness of the NPS. It acts as a hedge against inflation and moves inversely to equities, potentially reducing volatility in the NPS corpus. Over the past half-century, we have calculated that gold has delivered an average annual return of 11%. This may not match up to equities but it is still a healthy rate."
The gold market has two attractive features for investors: scarcity supports its long-term appeal. The size of the market is large enough to make it relevant for a wide variety of institutional investors.
SHINY COVER
- Adding gold to NPS kitty will act as a hedge against inflation and moves inversely to equities
- Gold's long-term returns have been comparable to stocks and higher than bonds and commodities
- In the Union budget of this year, finance minister Arun Jaitley had announced the government's intent to develop a comprehensive gold policy to treat gold as an asset class
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In fact, a committee formed by PFRDA in the month of September 2014 under the chairmanship of G.N. Bajpai for review of investment guidelines for NPS schemes in private sector had in its report suggested introducing commodity trading viz bullion through Gold Exchange Traded Funds (ETFs) with ceilings of 1%. When asked about reservations against gold, PFRDA chairman Hemant Contractor did not completely rule out future investments in gold, saying: "We are not permitting investment in gold currently".
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