With gold prices on a steady decline, it makes sense to buy in a staggered manner than at one go
With gold giving negative returns for three years in a row, investors are experiencing that sinking feeling. While gold has always been a favourite investment option during Akshaya Tritiya, the falling prices may put off many, with investors having lost over 11% on the metal bought last year on the same occasion.
Since equities are faring better, gold’s lure as an asset class has been dampened across the globe. Data from World Gold Council show that investment demand for the yellow metal (bars and coins) fell to 44 tonne in the quarter ended December 2014 from 98 tonne in the quarter ended March 2013.
Investing in gold requires an understanding of complex set of factors, starting from the growth in the US economy, strengthening dollar index, investment demand and growth in the euro area, China and Japan. Naveen Mathur, associate director, commodities and currencies, Angel Broking, says the returns in this asset class are negative for the last three years because of the optimism and growth in the US economy, which could prompt the US Federal Reserve to raise the interest rates. “One thing is for sure that the rise in rates in 2015 will happen and this will be the prominent factor that will bring down the prices of gold in the international markets,” he cautions.
While sentiment towards gold for Akshaya Tritiya remains very high in India, irrespective of the prices, Mathur advises investors to purchase the metal in a staggered manner rather than buying all the desired purchases at one go.
Similarly, Anil Rego, chief executive officer and founder of Right Horizons, a wealth management firm, says investment in gold should be planned based on the expected returns, associated risks, benefits and asset allocation.
“Investments are financial decisions, which should be based on one’s asset allocation rather than emotions. A long-term horizon will help mitigate the risk by reducing volatility, and it is ideal to make investments on a regular basis rather than once,” he says.
For many investors, gold is an essential store of value for any financial emergency and is a hedge against inflation as well. Also, unlike real estate, investment in gold is highly liquid and one can sell at any point to meet any planned or unplanned needs.
Financial planners suggest that, ideally, a retail investor should not allocate more than 10-15% of one’s investment portfolio in the metal as any steep and prolonged downturn in its prices could reduce the returns in the long run.
Gold acts as a hedge in one’s investment portfolio as the metal has an inverse correlation with the equity market. “Thus when the equity market does not perform well, gold normally yields higher returns and vice-versa and, thus, the portfolio returns are balanced,” says Rego.
Gold investors should look at various options in the market apart from jewellery, bars and coins. One can look at gold exchange-traded funds (ETF) of mutual funds, which is a financial product physically backed with allocated gold bullion, listed on a stock exchange, and bought and sold in the form of shares.
To invest in gold ETFs, one must have a demat and trading account with a broker. Gold ETFs are like purchasing physical gold and storing it in the demat account. The investor need not worry about the storage, purity and safety of the investment. ETFs can be purchased for small quantities of gold and, being a liquid investment, can be sold easily. The ETFs sell at a standard market rate and the proceeds are realised within two working days of the sale, which makes it a transparent and a much better investment option compared to purchasing physical gold.
A buyer of jewellery can also opt for lower karat gold which is relatively cheaper than 22 or 24 karat. For example, 18-karat gold contains 18 parts gold and six parts another metal or metals, making it 75% gold. Analysts say if one buys lower-karat gold, it should be purchased from a reputed jeweller and hallmarked.
One can also invest in gold funds through Systematic Investment Plans (SIPs), where the investor does not even have to open a demat account and, thus, saves on charges like annual maintenance of demat account, delivery and brokerage and transaction charges.
By investing through SIPs, an investor can gain via the rupee-cost averaging, which means that when gold prices go down, the fixed SIP amount will buy more units and vice-versa, and since the payments are made at different points of time and at different net asset values, the purchase price of the units averages out over the investment period.
Wait it out
* While sentiment towards gold for Akshaya Tritiya remains very high in India, irrespective of the prices, experts advise investors
to purchase the metal in a staggered manner rather than making all the desired purchases at one go
* Investment in gold should be planned based on the expected returns, associated risks, benefits and asset allocation
* Financial planners suggest that, ideally, a retail investor should not allocate more than 10-15% of one’s investment portfolio in the metal as any steep and prolonged downturn in its prices could reduce the returns in the long run