Gold can cushion portfolio downturns, improve risk-adjusted returns: WhiteOak Capital MF study

Achieving an optimal level of risk-adjusted return may require investors to look beyond a single asset class and build a portfolio with a mix of equities, debt and gold, according to a study by WhiteOak Capital Mutual Fund.

The report explains that different asset classes respond differently to changing economic cycles and market conditions. Since it is not possible to consistently time which asset class will outperform, combining assets with different correlation characteristics can help improve the overall risk-adjusted return of a portfolio.

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This study on multi-asset allocation shows that gold has often provided downside protection in years when domestic equities delivered negative returns, highlighting the potential benefit of diversification.

Post examining the financial year-wise performance of select indices, including the BSE Sensex TRI, CRISIL Short Term Bond Index, MCX Gold and S&P 500 TRI (INR), it notes that different asset classes have varying degrees of correlation, making it difficult to consistently identify the best-performing asset class in advance.

The historical data highlights several periods when gold performed strongly as domestic equities declined. For instance, in FY2020, the BSE Sensex TRI fell 22.86%, while MCX Gold gained 29.71% alongwith Crisil Short Term bond Index and S&P 500 TRI gaining 9.82% and 1.30% respectively and delivering 6.20% total return highlighting the concept of multi asset allocation portfolio. Similarly, in FY2016, the Sensex TRI declined 7.91%, while gold delivered a 10.86% return.

Gold also gained 32.92% in FY2012 when the Sensex TRI fell 9.16%. In FY2026, the difference was even more, with the Sensex TRI declining 6.01%, while MCX Gold gained 64.76%.

Why diversification matters

The correlation data in the study further supports this argument. Indian equity and gold had a correlation of -0.43 based on annual returns from January 2010 to July 2026. Debt and Indian equity had a correlation of -0.06, while gold and US equity had a correlation of zero.

A negative correlation means that the two assets have generally tended to move in opposite directions. This can help reduce the impact of a sharp fall in one part of a portfolio when another asset performs better.

How multi-asset portfolio helps

WhiteOak's study also shows how adding gold to an equity-debt portfolio can alter the return-volatility equation. A portfolio comprising 55% debt, 25% equity and 20% gold delivered an average annual return of 11.59% with volatility of 6.83%, compared with 9.76% return and 7.09% volatility for a portfolio containing 75% debt and 25% equity.

This suggests that gold's role in a portfolio is not limited to return generation. Its relatively different behaviour compared with equity and debt can potentially help improve diversification and manage portfolio volatility.

It further highlights that adding a judicious combination of Low Correlated, No Correlated, and Negatively Correlated growing asset classes can achieve a superior risk-adjusted return on the portfolio level.

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Gold's long-term performance

Over the period covered by the study, from FY2011 to FYTD2027, MCX Gold delivered a CAGR of 14.19%, compared with 11.07% for the BSE Sensex TRI and 7.60% for the CRISIL Short Term Bond Index. The S&P 500 TRI in INR delivered a 19.55% CAGR over the same period.

However, the data also shows that gold does not outperform equities every year. For example, gold declined 8.34% in FY2015 and 3.20% in FY2014, while domestic equities gained 26.81% and 20.73%, respectively. This reinforces the importance of viewing gold as a diversification asset rather than trying to use it to time the market.

The key takeaway from the study is that portfolio construction need not depend on identifying the single best-performing asset class. Instead, combining assets with different return and correlation characteristics can help investors manage risk across market cycles.

The study cautions that the historical performance of the sample multi-asset portfolio does not represent the performance of any scheme and that past performance may not be sustained. The analysis is intended to illustrate the concept of multi-asset allocation.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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