Gold can strengthen portfolio diversification without sharply increasing volatility: WhiteOak Capital MF

Gold is often considered a safe-haven asset during periods of uncertainty, but a recent study by WhiteOak Capital Mutual Fund suggests that the precious metal can also play a bigger role in portfolios by helping improve overall returns when combined strategically with equity and debt investments.

The study, titled “Chemistry of Investing”, analysed how combinations of debt, equity, and gold have historically influenced portfolio risk and return outcomes between September 2001 and April 2026. According to the findings, adding equity exposure to a debt portfolio improved returns without necessarily increasing volatility proportionately. Interestingly, the study found that introducing gold as a third asset class further enhanced the portfolio’s risk-return profile.

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As per the analysis, a 100% debt portfolio generated an average annual return of 6.83% with a volatility of 6.38%. However, a portfolio consisting of 55% debt, 25% equity, and 20% gold delivered an average annual return of 11.61% with volatility of 6.86%, which remained relatively close to the all-debt portfolio’s volatility level.

Source: WhiteOak Capital Mutual Fund

According to the fund house, this demonstrates how combining low-correlated asset classes such as gold with equities and debt can potentially improve risk-adjusted returns over the long term.

“This clearly shows 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,” the study said.

The study noted that gold has historically provided downside protection during several periods when domestic equities delivered negative returns or while equities have generated stronger growth during risk-on phases.

Since economic cycles and markets across the globe are very dynamic and it is not possible to consistently time the winning asset class, but a right mix of these asset classes may help investors achieve optimum level of risk adjusted return to attain their long-term financial goals.

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The study also highlighted that investors today have multiple avenues to gain gold exposure beyond physical purchases, including gold ETFs, gold mutual funds, sovereign gold bonds and multi-asset allocation funds.

According to the study, an 80% Bond and 20% Equity combination represent almost similar volatility as a 100% Bond portfolio on average with over 3% higher return measured for 1-year of the average volatility (standard deviation) and average return observations which means the asset allocation portfolio has delivered better risk-adjusted return than a 100% Bond Portfolio.

A 75% bond–25% equity combination generated 9.87% average returns with volatility of 7.04%, the study said.

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