In the same week that Dhanteras crowds pushed physical gold and silver sales past Rs 66,000 crore, a new report has raised concerns about how much Indian investors are putting into gold through financial products.

Data compiled by OmniScience Capital shows that gold exchange-traded funds (ETFs) are drawing new investors much faster than equity mutual funds. Since September 2023, the number of gold ETF folios has risen 2.6 times, compared with a 1.3-fold increase in large-cap fund folios. Even after adjusting for returns in each asset class, gold ETF assets have grown much faster than equity fund assets. According to the firm, this suggests investors are buying mainly because gold prices have been rising.

"We believe this FOMO behaviour would have been similar for any security whose price is rising. This aggressive migration signals a notable departure from structured asset allocation," said Ashwini Shami, President and Chief Portfolio Manager at OmniScience Capital.

When a diversifier becomes a large bet

The report's main concern is proportion. Gold is generally classified as an alternative asset and typically makes up 5–10% of an investment portfolio. The wider alternatives category usually accounts for about 10–20% and also includes private equity, structured debt, Specialised Investment Funds (SIFs), REITs and InvITs.

Measured against that framework, the current numbers stand out. Total gold ETF AUM has risen to nearly Rs 1.9 lakh crore, close to half of the roughly Rs 4 lakh crore managed by large-cap equity funds. The firm said a gold allocation of about 47% of large-cap fund assets appears overstretched and calls for caution.

This matters because gold is usually held for diversification, to cushion a portfolio when equities fall. If investors put in large amounts because of recent returns, gold becomes a concentrated bet on prices continuing to rise rather than a hedge.

Why future returns may be lower

Shami said he remains positive on gold over the long term. He urged investors to review their portfolios and to expect lower returns from gold in future. He also questioned the assumption that gold prices, inflation and interest rates will all keep rising together in the coming years.

The report addresses a common argument for higher gold prices: strong buying by central banks. It says that buying may not be enough on its own. If other investors move into fixed-income instruments that offer better yields, larger allocations to short- and medium-duration debt could offset official demand and keep global gold prices more balanced.

What it means for investors

The report does not tell investors to sell their gold. It argues that past returns should not decide how much gold a portfolio holds. Many first-time investors entered gold ETFs during the recent rally, which makes it worth checking whether one asset has grown well beyond its intended share. For most investors, the practical step is to rebalance so that gold stays within the commonly recommended 5–10% range.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Please consult a SEBI-registered financial advisor before making investment decisions.

With inputs from IANS