Gold prices have risen significantly in the last two years. You might be getting advice or reading about how gold is a great investment.
Traditionally Indians love to buy gold. We believe in investing in the metal either in the traditional form or buy paper gold in terms of mutual funds or bonds.
I have attempted to answer a few questions on investment in gold.
Is gold a good investment?
Indians do not always look at gold as an investment. We buy it for consumption and for auspicious occasions. We should not treat the gold bought for consumption as an investment for the simple reason that we will not sell it when prices are attractive. Moreover, it is in jewelry form and therefore it is not considered in the ‘commodity’ sense. So, you may not get the market price for it. Impurity, mixed elements, wear-n-tear will get considered when you try to sell it.
Gold, which is bought in form of pure investment can be in terms of gold coins, gold bars, Gold ETFs, or Gold bonds. This can be considered in your asset allocation.
Gold in Dollar Vs INR – you can clearly notice that in dollars Gold is still at the level of 2011 but as in the last 10 years, Indian Rupee depreciated against the dollar we can see the positive returns.
Also Check:- 5 Benefits of Gold Monetization Scheme
Why should you invest in gold?
In the current scenario, the price of gold is rising. In hindsight, it looks like an excellent investment. But you should not consider investing in gold only from a returns perspective. There are many other assets that offer better returns, lower risk, higher liquidity, etc. Moreover, physical gold purchase includes insurance cost, storage cost, etc. which will lower your returns. If you are going to add gold to your portfolio, consider the reasons mentioned below –
Liquidity – Gold offers liquidity in some ways. In emergencies, you can always sell gold to get money. Gold mutual fund schemes are redeemable without much hassle.
Hedging Tool – Gold is a great hedging tool. It protects against inflation and volatile markets. Usually, when markets are falling, gold prices rise. This will balance out the overall value of your portfolio.
Gold is also a hedge against Indian rupee depreciation.
Limited access to markets – Some people do not have great access to markets. Others are wary of investing in equity-based assets or paper-based assets. Such people can invest in gold so that their money is working for them rather than lying almost idle as cash or bank deposit.
Muslims who follow shariah can’t invest in debt investments can consider gold.
Diversification – Different kinds of assets in the investment portfolio balance the returns and lower the overall portfolio risk. So, if your goal is diversification, add gold to your portfolio. Gold usually moves inversely to the stock market and currency market and thus brings a balance to your portfolio.
Desire – If you are a person who likes owning gold, consider adding it to your portfolio. Your portfolio will have one more type of asset and you will feel good. Mental well-being is crucial to a happy, healthy life.
Why should I not invest in gold?
Do not invest in gold if you are only seeking returns. Though gold has risen quite a bit in the past few years, it may not always have similar traction. Investments in good performing equity-based assets have the potential to give better returns, especially over the long-term.
As of now, gold seems to be on a high. It might be better to consider investments when the prices are tapering down. (but if you have zero exposure – you can start accumulating gradually)
Gold is still determined by sentimental factors. Therefore, your investment depends on whether other people are ready to pay a higher price. Therefore, you should be careful when you invest in it and how much you invest in it.
Buying physical gold has its issues. You may need to buy insurance, a safe box, or pay for offsite storage. These costs will cut into its investment potential.
How should I invest in gold?
There are different ways of investing in gold –
Sovereign Gold Bonds (SGBs) – SGBs are government securities denominated in grams of gold. The minimum investment is one gram and the maximum is 4 kg. An interest rate of 2.5% per annum is payable to investors. The tenor of the bond is 8 years though one can sell after 5 years based on certain conditions. Capital gain tax is exempted. (NRIs can’t invest in SGB) Read more about Sovereign Gold Bonds Here
Gold ETFs and Gold funds – Buy paper-based assets whose value is based on the value of gold. You can invest in Gold ETFs via a Demat account. Gold funds can be bought directly from mutual funds or via Demat accounts. There will be some management charges but there will be no risk of theft. You can invest small amounts over the long term via the SIP option. Gold ETFs require a minimum investment equivalent to at least 1 gram and Gold funds usually require a minimum investment of Rs. 500.
Gold coins, gold bars, and jewelry – You can buy them without a Demat account. Consider additional costs related to security, taxes like VAT and GST, impurity, making charges, and risk of theft.
Check – 7 Ways to buy gold
Gold is a strategic investment only if it suits your requirements. Even if gold has to be part of your investment portfolio, ensure that it does not go beyond 5%-10% of the overall portfolio value.
If you have any questions – add in the comment section.