Investing money in gold is useful because it is a hedge against inflation. Over a period of time, the return on gold investment is in line with the rate of inflation. Gold is negatively correlated to equity investments.
Return on gold investment
Investment in gold proved remarkable from 2006 to 2011. During that period, the metal has given average return of 29% per annum which was better than other investment options. However, the long-term average return on gold investment is less than 10% p.a. Here are few tips on how to invest in gold.
Our age-old and traditional way of investment is jewellery buying where one can buy gold ornaments, bars or coins. However, it has its own disadvantages. Total buying cost involves heavy making charges. However, when you try to sell the same piece to the same jeweller, he will buy it at below market rates and deduct those making charges from the total price of your jewel.
Gold coins, bars
Investment in gold coins and bars is a better option. You should buy gold bars and coins only from a jeweller. Banks sell gold coins and bars, but they cannot buy it back. Whereas, the jewellers can buy back the gold coins from you.
You can buy Gold ETFs from the stock exchange by way of opening a demat account and trading account. You have to pay brokerage fee (which is generally 0.25-0.5%) for buying and selling of these gold ETFs. You will have to further pay 0.5-1 % charges as fund management charges.
Gold fund is a fund-of-funds which will invest in Gold ETFs on behalf of you. One does not need any demat account. As this is like any other mutual fund scheme, SIP investment in gold is possible through these gold funds.
Equity-based gold funds
These funds do not directly invest in gold but invest in companies which are involved in mining, extracting and marketing of the gold. Besides, its performance is purely dependent upon the performance of the fund house and the equities they are investing. Investment in these funds is suitable for investors with high-risk appetite. There are no listed companies in India associated with gold. Therefore, these funds trade in international market and are quite susceptible to currency risks apart from gold-risk and equity based risks.
How much to invest in gold?
In fact, 5-10% of your assets can be invested in gold. If you invest more in gold, remember that in the long-term return on gold investment is less than 10% per annum. There is no right or wrong time to invest in gold. You need to invest in gold for a long term like over five years. It is better to stagger your investments over a period of time to average out the cost of purchase. You can start investing in gold online either by investing in gold ETF or by investing in gold funds. Gold funds can also be bought online just like investing in other mutual funds online.
The author is is director & chief financial planner, Holistic Investment Planners. Extracted from Tax Guru