International Journal of Business Management & Research (IJBMR) ISSN 2249-6920 Vol. 3, Issue 2, Jun 2013, 103-110 TJPRC Pvt. Ltd. GOLD VS STOCK MARKET: A COMPARATIVE STUDY OF RISK AND RETURN BARINDER SINGH 1 & J. B. NADDA 2 1 Assistant Professor, Shoolini University of Biotechnology and Management Sciences, Solan, Himachal Pradesh, India 2 Professor, Himachal Pradesh University, Sammar Hills, Shimla, Himachal Pradesh, India ABSTRACT An investor has various investment options to invest his money and this all depend on his risk profile and expectation of returns. Different investment options represent a different risk-reward trade off. Out of different types of investment options Gold, Stock Market, Mutual fund and Fixed deposits in the Banks are available in the Market. Traditionally people in India Invest in the Gold in the form of Jewellery at the time of marriages and keep this gold for a very long period but at the same time investment in the stock market is very limited because of its risky nature and possibility of loss of value. Though recently people in India has started investing in stock market also but investment in Gold is still preferred over investment in stock market.people perceive it more safe and ever-growing investment as compare to investment in the stock market. In India the most popular Stock Exchange is National Stock Exchange and the maximum volume of stock trading is with this stock exchange. The focus of present study is on the returns of the Index of National Stock Exchange(NSE) and its comparison with the returns of Gold for the same period and further comparison of risk for both the investments i.e. NSE Index and Gold is done to find out which is more risky. KEYWORDS: CAGR, Gold ETF, NIFTY, Risk, Return INTRODUCTION Every Individual wants to make more money with the help of money he already has. The process of making money out of money is known as Investment. Investment is the commitment of funds in an asset or financial instruments with the aim of generating future returns in the form of interest, dividend or appreciation in the value of the instrument. Investment is involved in many areas of the economy, such as, business management and finance no matter from households, firms, or Governments. Usually Investment is confused with the commitment of funds for gains only hence risk and duration of investment is ignored. Funds used for gambling, speculation also are committed for gains but these cannot be termed as an Investment. Investment is a process where an individual carefully analyze the various investment instruments available in the market defines his risk profile and then matching these two take the decision to put his money for a longer period to earn returns. An investor has different investment options to choose from, depending on his risk profile and expectation of returns. Different investment options represent a different risk-reward trade off. Low risk investments are those that offer assured, but lower returns, while high risk investments provide the potential to earn greater returns. Hence, an investor s risk tolerance plays a key role in choosing the most suitable investment. Various investment options available are Bank Deposits, Commodities like Gold, Silver etc., Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits and Stock Market options like Bonds and Debentures, Mutual Funds, Equity Shares etc., Of the various types of investment options in the Stock Market, Gold Exchange Traded Funds (Gold ETFs) happens to be one of the best options to be included in the portfolio for diversification of risk.
104 Barinder Singh & J. B. Nadda People can invest in the stock market directly through stock brokers by buying and selling the shares of different companies or they can route their investment through equity mutual funds where mutual fund company collect the money from individuals and issue mutual fund units to these investor further the collected money is invested in the stock market by the experts hired by the mutual fund company. In the same way there are different ways to invest in the Gold investor can buy gold from local jeweller, gold coins form bank, gold mutual fund or Exchange Traded Funds etc. Gold is always consider as one of the safest investment in India and moreover people prefer to invest in Gold as compare to the Stock Market. Stock Market Investments are considered riskier one but it is also said higher the risk higher the return. According to the saying 'higher the risk higher the returns' so for the stock market returns should be higher than the returns from Gold Investments. People invest their money according to their risk profile and expectation of the returns and it is the human nature that everybody wants higher returns at a lowest possible risk. REVIEW OF LITERATURE The different studies shows that in India and globally people prefer invest money in the yellow metal i.e. Gold because of its high returns in the recent past. The prices of yellow metals have risen fairly high and have yielded better returns than any other instruments over the last few years. Analysts say that the position for gold is still attractive in the medium term due to uncertainty in the global economies, and uncertain price changes in the global market. Investors can include precious metals to their portfolios carefully by buying in small quantities from time to time. (World Gold Council) High liquidity and flexible monetary policies of central banks across the world, to boost economic activity, further resulted in more investments in Gold, leading to higher prices of gold. The long-term benefit of Gold is its ability to stabilize a portfolio and protect it against market fluctuations. Historically, gold prices have shown better stability even during periods of crisis, as compared to other investment avenues. Most experts advise investing in gold as a "must", since gold creates a robust portfolio that withstands market fluctuations. India s domestic production of gold is very limited; the rising demand has to be sourced from outside the country. Moreover, Gold as a commodity on its own does not add much to the productive capacity of the economy as when one buys gold, it either is stored in lockers or gets converted into jewellery. In both the cases, money spent on purchasing gold gets blocked. (Assocham, 2011) As per a consumer demand report (World Gold Council) the consumer demand figures in selected countries suggests: India accounts for nearly one-third of the total world demand for gold i.e. 1059 tonnes. Indian consumer demand for gold is 37.6 per cent more than that of China (769.7 tonnes). Another major economy of the world USA reported at 213.5 tonnes. Moreover if we look at the demand for gold alongside the size of these major economies we see that: India s GDP is no where closer to that of China and USA. In terms of percentage share India s GDP is 27.7 percent of China and a meager 11.0 percent of USA. (UNCTAD, RBI) Thus looking at the pattern of gold consumption in India it seems that creating awareness about the different gold investment avenues and trading in such avenues can help in bringing down the demand of physical gold. In his article Bakul Chugani Tongia pointed out that, in the month of May 2010 alone, Gold ETFs have clocked in about 8.7% gains, strengthening its role as a hedge against inflation as well as equity markets as Sensex has declined by about -5.6% during the same period. He also pointed out that, since the launch of gold ETFs in early 2007, they have emerged as a strong asset class, generating more than 27% returns (CAGR) in the past three years against the Sensex returns of just about 4% CAGR during this period.
Gold Vs Stock Market: A Comparative Study of Risk and Return 105 Fisher lists five reasons why the Gold remains the most universally accepted and time-tested asset class. The reasons are Effective Portfolio Diversifier, Thrives under worst conditions, Hedge against inflation, Linkage with oil and US Dollar and Widening demand and supply Gap. He suggested that gold must be made a part of the asset allocation because it is a great risk diversifier and considered as a safe haven during times of economic uncertainty, political strife, high inflation and wars. Fisher in his article mentioned that Gold Exchange-Traded Funds (ETFs) have made investing in the yellow metal very convenient and inexpensive. He expressed that they offer a way of participating in the gold bullion market without the necessity of physical delivery of gold. He listed out six reasons why gold ETFs are considered as the best way to invest in the gold. The reasons mentioned are Wealth tax exemption, Income tax benefit, Investment in small denominations, Hedging, Convenience and better holding of ETFs as compared to physical gold holdings. Dr. Prashanta Athma and Ms Suchitrak pointed out in their article that Gold ETF is an emerging option of the various investment alternatives available to the investor. The low volatility of gold prices as compared to equity market, weakening of Indian Rupee against US Dollar and growing uncertainty about global economy resulted in the emergence of Gold ETF as a strong asset class. Allocation of a small portion of investment in Gold ETF would diversify the portfolio risk. Inclusion of any Gold ETF in the portfolio of assets would diversify the risk. Gold ETFs also offer the benefit of lower incidence of tax. Inspite of the merits of holding Gold ETFs, the investment in the same is low due to the low awareness among the investors and the sentimental attachment of the investors towards holding gold in the physical form. OBJECTIVES OF THE STUDY The objectives of the study are to: To Compare the returns of Gold and Stock Market Index. To measure the risk involved in Investment in Stock Market and Gold To find out the best Investment Instrument among Stock market and Gold on Risk Return basis. Methodology: The period of study is Eight Years starting from 2005-2006 to 2012-13. The data for this period is collected from the official website of National Stock Exchange for the Index Value and the data for the spot prices of Gold traded is collected from the official website of Multi Commodity Exchange for the same period. Tools: The different Statistical tools used in the present study are Standard Deviation it is a measure of volatility and Compounded Annual Growth Rate, it tells about the annual growth in the initial investment over a period of time Percentage is used to calculate annual percentage returns of the given data. DATA ANALYSIS AND INTERPRETATION Table 1: Annual Closing Value of Index (Nifty) and Returns Calculations Date Close Annual %Age Returns Returns 4/1/2005 2067.65 - - 4/3/2006 3473.30 1405.65 67.98 4/2/2007 3633.60 160.30 4.62 4/1/2008 4739.55 1105.95 30.44 4/1/2009 3060.35-1679.20-35.43 4/1/2010 5290.50 2230.15 72.87 4/1/2011 5826.05 535.55 10.12 4/2/2012 5317.90-508.15-8.72 4/1/2013 5682.55 364.65 6.86 Source: Compiled from NSE Website nseindia.com
106 Barinder Singh & J. B. Nadda Source: Calculated in the Table 1 Figure 1: Nifty Annual Returns Chart Table 1 Shows that over a period of eight years the value of index has grown up from 2067 to 5682 it means those who invested in the index eight years back got positive returns from their investment in eight years period. Figure 1, also shows during this period index has delivered negative returns in the year 2008-09 and 2011-2012 -35.43% and -8.72% respectively, this was the period of global recession and slowdown which affected the Indian stock markets also. Though money has grown up over a period of time but stock markets negative returns fear the people and also shows that there is risk in this market. Table 2: Annual Closing Price of Gold and Returns Calculations Date Spot Annual %Age Price(Rs.) Return Returns Jun 6 2005 6075 Apr 1 2006 8480 2405 39.59 Apr 2 2007 9357 877 10.34 Apr 1 2008 11831 2474 26.44 Apr 1 2009 15114 3283 27.75 Apr 1 2010 16320 1206 7.98 Apr 1 2011 20704 4384 26.86 Apr 2 2012 28000 7296 35.24 Apr 1 2013 29526 1526 5.45 Source: Data Compiled from mcxindia.com Source: Calculated in Table 2 Figure 2: Annual Returns from Gold
Gold Vs Stock Market: A Comparative Study of Risk and Return 107 Table 2 shows the Closing price of Gold from 2005 to 2013 also annual returns in absolute value and in %age. Figure 2, Show that as compare to returns from NSE Index i.e. Nifty the returns of Gold are never in negative in these eight years though there is variance in returns and these went down to even 7.98% and 5.45 % in the years 2009-2010 and 2013. The returns of Gold shows that Investment at any point of time in Gold will yield some positive returns for investor so it doesn't seem to be risky invest in Gold. Source: Data Compiled from Website of NSE Figure 3: Monthly Closing Value of Index (NIFTY) The above Graph shows the value of Nifty Index during the period from 2005 to 2013. It shows that how value of the Index moved during this period and finally in the end of the period it has gained the value. But if we magnify it and try to understand the graph we can see the variations in the value of index which are very high. As we know that nobody can time the market so it is very difficult to know the right period to invest in the market. Graph shows that if one has invested in the year 2005 he can takeout handsome returns at the end of investment period but if the same person invested in the end of 2007 or starting of 2008 he still stands at the same level and earned nothing even after being invested 5years in the market. The returns from stock market are not smooth and also they are very risky due to their volatile nature and one must have very good knowledge of market to invest in it. So lot of hard work is required to invest in stock market to earn higher returns. From an Individuals point of view one who is not well versed with the tools of investment and don't have technical knowledge of Investment, understanding of chart patterns etc. it becomes very difficult for him to invest directly in the market. They can invest in the Mutual Funds but returns of mutual funds are again not as high as we can see in the case of Gold but risk is surely lower than the stock market. Source: Data compiled from the website of Multi Commodity Exchange Figure 4: Monthly Closing Value Graph of Gold Prices
108 Barinder Singh & J. B. Nadda The above Graph shows the Spot Price data of Gold during the period from 2005 to 2013. It shows that how Price of the Gold moved during this period and finally in the end of the period it has gained lot of value. As discussed above nobody can time the market so it is very difficult to know the right period to invest in the market. Unlike Stock Market index graph we can see very little variations in the Price of Gold which is good for an investor to invest without an fear. Graph shows that if one has invested in the year 2005 he can takeout handsome returns at the end of investment period and also if the same person invested later in any year he still can earn good returns in Gold. The returns from stock market are not smooth and also they are risky due to their volatile nature also one must have very good knowledge of market to invest in it. So lot of hard work is required to invest in stock market to earn higher returns. But in Case of Investment in Gold it is not so risky and also do not require much expertise to study the market. Also the returns of Gold are very smooth. MEASURE OF RISK AND RETURN The true measure of risk and return are variance or Standard Deviation (σ) and Compounded Annual Growth Rate (CAGR). Standard deviation tells us about the volatility of the data (i.e. returns in present study) and CAGR tells about the compounded annual growth of the investment. Here in this study standard deviation and CAGR for both i.e. Index and Gold investments have been calculated and the results are shown hereunder: Table 3: Calculation of Standard Deviation and CAGR of Returns of Index and Gold Standard Deviation Returns (CAGR) Nifty 37.02 13.47 Gold 11.80 21.85 Source: Calculated from the data collected from NSE and MCX websites The above results shows the standard deviation of the returns of both Index (NIFTY) and Gold which tells us about the risk involved in the investment. The standard deviation of NIFTY calculated over last eight years returns is 37.02 and for the same period of Gold it is 11.80, it means the volatility of Index return is higher as compare to volatility of Gold returns. Higher volatility of Index means that there is high risk involved in the investment of stock market on the other hand risk of investing in the Gold is not so high and it is less 1/3rd of the risk of Investment in the index. If we compare the CAGR of both the investments we can clearly see from the Table 3 that returns from Index(NIFTY) are 13.47% per annum and from Gold for the same period returns stand 21.85% per annum. Returns from Gold are much higher than the returns form Index of stock market over a period of last eight years. While risk involved in the stock market is higher than the risk involved in the investment in Gold so the returns from the stock market also should be higher from the returns of Gold but present study shows that Gold in India is such an asset which delivers higher returns then stock market with lower risk involved in it. CONCLUSIONS Investment in Gold in is very popular in India and as compare to Stock Market the returns of Gold are much higher over the last eight years. People's preference of Investment in Gold yield them fruitful result in term of positive returns over a long period. On the other hand risk involved in the Gold is less than 1/3rd of the risk involved in the investment in Stock Market as shown in the study. Further to invest in the Gold investors need not to time the market understand the complex business environment and know about the various investment tools which are otherwise required in case if he invest in the stock market. the only thing an Investor need to take care of is that rather than buying jewellery
Gold Vs Stock Market: A Comparative Study of Risk and Return 109 one can go for buying Gold Mutual Fund of Exchange Traded Fund the returns of ETF are directly correlated with the returns of Gold returns REFERENCES 1. Bakul Chugani Tongia., 2010, Gold ETFs: Craze for safety adds to popularity, [online] Available at http://economictimes.indiatimes.com/markets/bullion/gold-etfs-craze-for-safety-adds-topopularity/articleshow/6005498.cms 2. Dr. Prashanta Athama, Ms Suchitrak, 2011,Gold ETFS: An emerging Investment Options, Asia Pacific Journal of Research in Business Management 3. Dipak Mondal, 2010, Despite rising prices, gold ETFs look strong, [online] Available at http://www.mydigitalfc.com/news-analysis/despite-rising-prices-gold-etfs-look-strong-755 4. Fisher, Gold As An Alternative Asset Class: 5 Reasons to Invest, [online] Available at http://www.themoneyquest.com/2008/11/gold-as-alternative-asset-class-5.html 5. Fisher, Gold ETFs: The Best Way to Invest in Gold, [online] Available at http://www.themoneyquest.com/2008/11/gold-etfs-best-way-to-invest-in-gold.html 6. www.gold.org 7. www.mcxinda.com 8. www.nseindia.com