Should you invest a mutual fund with a gold and silver ETF FoF combo?

Gold and silver are considered a hedge against inflation and a safe haven during economic uncertainty. However, adding gold and silver separately to your investment portfolio will increase two more investment products to manage along with the equity, fixed income, and other investment products you must be already managing.

Managing so many different investment products can involve a lot of time and effort. What if you could invest in gold and silver through a single product? In this article, we will understand why you should invest in gold and silver, the returns given by them, and how to invest in them through a single mutual fund scheme.

Why should you invest in gold and silver?

There are various reasons why you should invest in gold and silver. Some of these include:

Hedge against inflation: Gold and silver are considered a hedge against high inflation. Throughout 2022 and the first half of 2023, we saw high inflation in India and across the United States, Euro Zone, and many other countries. Expectedly, gold and silver did well during this time of high inflation.

Safe haven during times of economic uncertainty: In 2022, we saw a lot of economic uncertainty due to events like the Russia-Ukraine war, China lockdowns, supply chain disruptions, high commodity prices, depreciation of many currencies against the US Dollar, high food prices, etc. Some of these events, like the Russia-Ukraine war, continue in 2023. Due to high-interest rates, the US economy is vulnerable to a recession. All these uncertain economic events are expected to keep gold and silver prices higher.

Asset allocation: An investor should always follow appropriate asset allocation. They should diversify their investment portfolio into domestic equity mutual funds, international equity mutual funds, fixed income, gold and silver, real estate, alternative investments, etc. A diversified portfolio reduces the risk and gives better risk-adjusted returns. Also, various asset classes have low to no correlation with each other. Hence, when one asset class is down, the outperformance of others may make up for it. As per asset allocation, you should allocate some portion of your portfolio to gold and silver.

Financial goals: Some people accumulate gold and silver as part of their financial goals, such as accumulating gold and silver for their child's wedding. It is considered auspicious to buy gold and silver on festivals such as Dussehra, Diwali, Akshay Tritiya, etc. Gold and silver are among the most gifted items on occasions such as birthdays, marriages, festivals, anniversaries, etc. Some people consider buying gold and silver as a symbol of prosperity or status.

Gold and silver returns: In the calendar year 2022, gold (11.8% return) and silver (9.74% return) did better than the Nifty 50 (5.7% return) and most fixed-income instruments. In 2023, gold made a good start by giving around 8% returns in the first quarter.

Gold price chart for last 10 years

(Source: Goldprice)

The above chart shows how the price of gold has more than doubled in the last 10 years, giving total returns of 117%.

Investing in gold and silver through a single scheme

Rather than investing in gold and silver separately through 2 different schemes, some fund houses have launched gold and silver ETF FoF. A gold and silver ETF FoF allows an investor to invest in gold and silver through a mutual fund scheme.

As of May 2023, two fund houses have launched this scheme:

1. Edelweiss Gold and Silver ETF Fund of Fund and
2. Motilal Oswal Gold and Silver ETFs Fund of Funds

The Edelweiss Gold and Silver ETF FoF was launched in September 2022. It invests in gold and silver ETFs of various AMCs. The scheme document mentions the minimum and maximum gold and silver indicative asset allocation in the 35 – 65% range. However, the scheme will aim to maintain equal allocation (50:50) between gold ETF and silver ETF and rebalance the allocation periodically.

For example, if you invest Rs. 100 in the scheme, it may allocate Rs. 50 to gold ETF and Rs. 50 to silver ETF. As the prices of gold and silver move, the allocation will change. The fund manager will rebalance the portfolio and revert to the 50:50 allocation. As per the last factsheet available, as of 30th April 2023, the scheme has invested 49.86% of its assets in ICICI Prudential Gold ETF and 49.74% assets in Aditya Birla Sun Life Silver ETF.

The Motilal Oswal Gold and Silver ETFs FoF was launched in September 2022. It invests in gold and silver ETFs of various AMCs. When the scheme was launched, it started with a 70% allocation to gold and a 30% allocation to silver. Post NFO, the gold and silver weights are market driven. The maximum weight capping for gold and silver is 90% of the portfolio. If the exposure to gold or silver breaches the maximum capping level (90%), the portfolio is rebalanced.

As per the last factsheet available, as of 30th April 2023, the scheme has invested 68.8% of its assets in ICICI Prudential Gold ETF and 30.5% assets in Nippon India Silver ETF.

Should you invest in a gold and silver ETF FoF?

We have discussed that you should have some exposure to gold and silver due to high inflation, economic uncertainty, asset allocation, financial goals, etc. You can either take exposure to gold and silver separately through 2 different schemes or through a single gold and silver ETF FoF. Investing through a single scheme makes it easy to manage.

Hence, based on your asset allocation, you may invest some part of your overall investment portfolio in a gold and silver ETF FoF. If you want equal exposure to gold and silver, the Edelweiss Gold and Silver ETF FoF provides it. However, if you are looking for higher exposure to gold than silver, the Motilal Oswal Gold and Silver ETF FoF provides it.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.