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Wednesday, November 3, 2010

Sensex Outperforms Gold in Last One Year

On Dhanteras today, you might bought gold like thousands of other Indians. But would it make you wealthier than other investments?

Not necessarily, if you look at recent history.

Of course, it all rests on the timing. Even though there have been many headlines about how high the gold price has risen, you would have become wealthier had you bought Indian stocks or equities a year ago compared with gold.

The Bombay Stock Exchange's 30-share Sensitive Index has gained 32% in the 52 weeks through Tuesday, while gold's spot price in rupee terms is up 23%, according to the Bombay Bullion Association.

India's stock market has benefited from large investments by foreign investors, who have been looking for high-performing stock markets around the world. They find India attractive, thanks to its projected annual economic growth rate of more than 8% and fast-growing companies. So far this year, foreign institutional investors have poured $24.5 billion into Indian stocks.

However, it has not all been smooth sailing. In the early months of this year, for instance, some large investors got jittery and pulled money out of Indian stocks, causing the Sensex to fall. They came back several weeks later, leading to gains.

In contrast, gold prices have been relatively less volatile.

But like stocks, gold prices, too, have been dependent on foreign investors. The physical demand for gold, for use in industries or jewelry, has not jumped in recent years.

Instead, large investors in the U.S. and in other parts of the world are hoarding gold because they are worried that there could be another economic setback in America or other European countries. In such a scenario, stocks could lose value and gold typically gains value because it's considered a "safe" investment and a currency of last resort.

Also, in the last few years, central banks around the world have printed a lot of new money, some of which has been used by investors to buy gold. This all has pushed up the gold price.

So, where should you invest your money now?

In both stocks and gold, though in varying degrees and with different goals.

Buy stocks for growth over the long-term but be prepared for volatility. We believe that the Indian stock market will continue to do well over the next several years as Indian companies continue to grow rapidly. Decades of bull market has been already been experienced by developed countries like US and Japan. For India, this could be an start of multi years bull run. 

We expects that profits of Indian companies could grow by more than 20% a year in the near future. Stocks could deliver more than 15% per annum over the next few years on the back of strong corporate earnings growth.

Typically, stocks should form a major part of an investor's portfolio – between 50% and 65% of your investments if you can handle moderate risk.

Gold, on the other hand, has not been a high-return investment over the long-term but it can protect a portfolio from massive losses over periods of time.

Given that fears about the global economy still abound, if global markets collapse or stocks lose value for another reason, typically gold will gain. This is what happened in 2008 when stocks fell by around 50% but gold gained in value.

We suggest that individuals put around 10% to 20% of their portfolio in gold, typically through gold exchange-traded funds, a type of fund which trades like a stock. Gold ETFs aim to track the daily spot price of gold and ETF providers use your investment to buy equivalent gold and keep it with a bank or custodian.