The Buyt Desk
Gold is purchased as an investment and wearable. Most Indians invest in gold every year. Let us understand the benefits of including gold in our investment portfolio.
Gold is a beautiful precious yellow metal. For decades it has enticed people, especially women all over the world. Its beauty and appeal have made Indians’ gold obsession stronger. India is a major gold consumer as we love to possess gold ornaments and it is considered auspicious to buy gold during special life events and festivals. Irrespective of gold rates, Indians will buy gold.
Why should Gold be part of your investment portfolio?
Growing up in an Indian household, we have seen gold in the form of wearable or temple accessories and very less as an investment. We inherit gold from our parents and it may be running in the family for many generations. Currently, when the gold rates have reached sky-high, our way of looking at gold has changed. For this generation, gold is an investment.
The global economy is rapidly changing and it will be favorable if we diversify the portfolio. Gold is an inflation hedge. Gold can be your long-term investment and it will help you against bad stock market swings. Gold even works as insurance in times of distress like economic crises, government failures, natural disasters, or financial crises. The perceived value of gold rises during inflation causing contagion in financial markets which depreciates the local currency, bonds, and so on.
What are 3 Gold Investment Alternatives?
The 3 gold investment alternatives are Sovereign Gold Bonds (SGBs), Gold Exchange Traded Funds (ETFs), and Physical Gold.
Sovereign Gold Bonds (SGBs)
On behalf of the Government of India, SGBs are issued by the Reserve Bank of India (RBI) in multiples of one gram of gold. SGB is traded on the market. The bondholders will not possess physical gold but the value of a bond will be affected by fluctuations in the gold rate. The market returns of SGB are related to the price of gold. SGBs pay interest semi-annually at a fixed rate of 2.50 % per annum on the initial investment. SGBs can be used as collateral for loans. The minimum holding duration of SGB is 5 years hence it is for investors with modest liquidity demands and a lengthy time horizon.
Gold ETFs
The gold fund is an open-ended mutual fund that invests in Gold ETF units. Like SGB, the returns and the market price of gold are influenced by its price changes. Compared to actual gold, ETFs will not cause investors inconveniences of storage and paying charges. On behalf of the investors, the ETF management keeps the physical gold in the government treasury. Opening a trading – Demat account with any broker is necessary to invest in gold via ETF. Gold ETFs are for investors with strong liquidity requirements and a short time horizon. These may be sold on the exchange at any moment. Hence it is for investors who cannot commit to long-term investment owing to immediate financial demands. The ETF management charges service fees. The returns on Gold ETFs are much lower when compared to the real gold return. These can also be utilized in regular SIPs and later redeemed for consumption.
Physical Gold
Physical gold is the most purchased alternative as it is a direct way to gain exposure to gold. Physical gold can be in the form of Bullion, Jewelry, or Coins and can be purchased from jewelers. The purity decides the value of physical gold. Storing physical gold is a task as there is a danger of theft hence it may need lockers which will incur storage costs. In times of distress, physical gold is best as it is easily accessible and liquefiable. This form of gold can also be used for gifting. This form of gold is for long-term investors and the one who wishes to speculate on gold prices. To eliminate making charges, go for billions.
Summing up
Irrespective of the returns gold generates, it should be included in every long-term portfolio. No method arrives at a perfect allocation percentage in the portfolio. Gold is an investment and also acts as insurance in times of distress. Based on your conditions and investment requirements you can choose any one form of gold for investment or multiple alternatives. Each has its pros and cons. SGB generates tax-free profits. ETF is liquid and may raise or decrease its gold holding. Physical gold can be passed on for generations and gifted.
