Gold, Silver Or Bonds — The Best Safe Haven Asset For Equity Wary Investors

Nifty and Sensex have run up by over 18% this year. “Historically when global equity market valuations, marketcaps are higher than normal average, and their forward returns are lower, it makes a case for safe haven assets,” says Pankaj Pathak, fund manager at Quantum Mutual Fund. 

In the last few months, investors have been shifting gear, leading to the big bullion bull run. In addition to gold gaining over 28% this year, even silver, which isn’t a pure safe haven asset, hit a 12-year high last week. 

“Due to its historical significance, gold remains the favoured safe haven, while silver has two benefits. Because of its extensive industrial use, which increases volatility, it is less stable than gold in times of crisis. Nonetheless, because of increased speculative interest, silver may fare better than gold during inflationary times,” says Romit Dwivedi, senior wealth manager from Dubai, who caters to global HNIs. 

Silver is a good option for those looking beyond gold. "Silver, like gold, can remain low for a long period of time before giving a breakout, which sometimes can be better than gold,” says Sriram BKR, senior investment strategist, Geojit Financial Services Ltd.

The gold surge has not taken its sheen away for investors, insist experts who believe gold has the highest opportunity cost. 

“Fundamental factors are all in place for gold to go further up. With rate cuts, the cycle has turned in its favour, and geopolitical conflicts continue. The theme of diversification away from dollar and the US will continue to play out and support the prices,” says Chirag Mehta, senior manager, alternative investments at Quantum Mutual Fund. 

Gold ETF inflows have also increased in recent months after the Budget allowed tax indexation benefits on long term capital gains tax. 

While commodities are safer than equities in times of uncertainty, they’re also heavily dependent on the dollar index. Commodities typically have an inverse relationship with the dollar index. If the dollar index rises, commodities may decline.

“We anticipate significant volatility in the dollar index over the next three months, influenced by the upcoming US elections and Federal Reserve meetings. We firmly believe that the dollar index will not dip below the 100 level prior to the US election results. If Trump is re-elected as the president, the dollar may strengthen further,” says Rahul Kalantri, VP of commodities at Mehta Equities. 

Mutual funds might have taken the sheen off fixed deposits in the last few years. But fixed income could make a comeback for various reasons if fear exceeds greed in the equity markets. 

Central banks around the world have been cutting interest rates, making bonds even more alluring. “Lower interest rates improve the value of bonds; bond prices may rise higher as central banks are predicted to keep cutting rates. Premium corporate bonds provide a solid risk-return ratio and act as a buffer against future corrections in the equity market,” says Dwivedi. 

The percentage of investors going for debt mutual funds in India is very low, and can gain from portfolio rebalancing. 

Kalantri agrees. “Considering the current landscape, where major central banks are reducing interest rates, the RBI may also feel compelled to follow suit. This could be beneficial for long-duration bonds. We believe now is an excellent time to invest in bonds, as they may offer attractive short-term returns and serve as a hedge for your equity portfolio.”

Mehta believes that the government has been reducing its borrowing creating a supply constraint. “To capture gains better, it’s better to lock in long term FDs or long-term bonds to ensure a possible interest rate cut doesn’t affect it,” he adds. 

While safe havens might look attractive now, only the incremental investments might go into safe haven assets. A few might even prefer holding onto cash as opposed to locking them in safe haven instruments. 

“A few investors might even choose to hold onto cash to re-enter the equity market at a later date,” says Mehta. 

Thanks to the spectacular equity market run-up in the last two years, a lot of them are sitting on spectacular gains. If one sells now, they’re subject to the new regime of capital gains tax. 

“Some of them who plan to re-enter again, ask—will the fall in the market cap segments be so high, so that it makes a reasonable case to enter again for a long-term. It's largely again timing the market, which is very difficult," says Sriram. 

In the Budget 2024, Finance Minister Nirmala Sitharaman has altered short-term capital gains tax on stocks, equity funds to 20% as against 15% earlier. The tax has impacted them so much that investors are going slow on rebalancing their portfolio from mid and small cap stocks to large caps, which offer a better risk-reward profile. 

“For those looking for intermittent and incremental rebalancing, it's a better idea to invest in a multi asset fund, where the rebalancing will happen at the fund level than at the individual level,” says Sriram. 

Indian investors now face a tough tradeoff between a possible market crash and a real tax incidence—and some of them might even choose to brave the volatility. 

Katya Naidu is a senior business journalist who writes about equity markets, startups, energy, infrastructure, real estate and healthcare.

Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.