Come Diwali, the sale of gold ? be it jewellery, coins, or any other form ? goes up manifold. With the price of the yellow metal having declined over the last few months, shoppers have had an added reason to rejoice. Gold is currently hovering around R27,000 per 10 gram (against nearly R30,000/gm a year ago). An overall improvement in the economic scenario will only boost consumer sentiment.
However, how wise is it to get carried away by all this? Let?s pause and consider whether gold is indeed worth investing. Not long ago, the global economy was in turmoil, with gold acting as a safe haven for investors. However, now, in the light of some economic stability and with a more stable government at the Centre ? and a resultant improvement in consumer sentiment ? investors are no longer looking for safe havens.
One reason that gold has come off recent highs is that markets like the US have started doing well again. This has resulted in an increased risk appetite, which, in turn, has led to reduced investments in gold. But, again, keep in mind that any negative news on this front will result in gold prices going up once more.
Remember, gold prices are denominated in dollars and traded in the international markets. Domestic gold prices are arrived at by simply converting these dollar prices into Indian rupees at prevailing rates.
Another important aspect to note is why we buy gold. If you want to purchase jewellery for personal consumption, go ahead. However, while in the short to medium term, gold could underperform with volatility having increased, it is better to invest in gold on a systematic basis.
Invest on the basis of your preferred asset allocation. You could keep about 5-10% of your portfolio in gold, to diversify. If a majority of your investment is in equity, then gold provides a good hedge when the markets are volatile.
As far as options of buying gold are concerned, you could go in for the physical form, ETFs, gold savings schemes, and so on. Then there are gold funds, too ? these are mutual funds that invest in companies engaged in gold mining or processing. They are indirect beneficiaries of hike in gold prices. The procedure to invest in such funds is similar to any other MF, and you have the option of SIPs as well.
While all forms of gold have their own pros and cons, it makes sense to look beyond the physical form. Gold ETFs and e-gold are cheaper, with only brokerage charges of around 0.5% to be paid, compared to 10-15% making charges for physical gold (jewellery).
Another advantage of buying gold in the electronic form is that it is linked to international prices, thus being very transparent, which is not the case with physical gold, where every jeweller offers a different price.
Investments in gold are taxable at the time of redemption/sale. In case of physical and e-gold, long-term capital gain is calculated after three years. For gold ETFs, LTCG is calculated after one year (as is the case with gold mutual fund). However, you can use indexation to reduce the tax burden.
Let your asset allocation be the basis for investing in gold. You can also look at other precious metals and gems (silver, platinum, diamonds, etc) or even invest, for the medium-long term, in balanced funds or equity-linked instruments.
The writer is CEO and founder, Right Horizons