Do not invest in gold seeing the last 12 months return and also do not invest in gold jewellery and call it an investment as you will not sell jewellery to rebalance your portfolio.
Gold has been one of the popular investment choices for Indians for generations, with India being the largest consumer of gold for the last many years. In the last 12 months, gold has been a popular investment choice globally as well, which has resulted in a good run for gold, which is, in turn, creating a lot of interest amongst investors wondering if they should add gold in their portfolio. Let us answer some of these questions.
Should gold be part of your portfolio?
Gold is an unproductive asset, which does not contribute directly to economic progress. So, a lot of experts are of the opinion to not have gold as part of the portfolio. Gold has its own merits to be considered in a portfolio.
Gold, over the years, has been seen as an inflation hedge and also, it does well during panic or uncertain times like the current scenario. Due to this gold can act as a Hedge for the Equity in the portfolio during situations like the current times. In India, a significant portion of the returns has come due to the depreciation of the rupee, as a weaker rupee adds to gold returns. Hence, gold investments make sense as a hedge against a weak rupee too.
Risks of gold investments
Gold over the last many years has seen a periodic spurt in prices, which is followed by long periods of low to NIL returns. Gold is a volatile asset as prices fluctuate quite sharply, so there can be periods where gold can give negative returns.
How much to invest in gold?
We recommend not more than 5-7 per cent of one’s portfolio should be in gold investments. There could be some exceptions like a near term wedding corpus. The exact allocation would depend on the individual’s horizon, requirements and risk profile, but generally would not recommend going with a high allocation to Gold.
How to invest in gold?
There are various modes of investment into gold, but broadly can be classified into two, Physical Gold and Financial Gold.
Physical Gold is when we have options for buying gold coins or gold jewellery. Financial gold is when we have options like sovereign gold bonds (SGB’s), gold ETF’s and gold funds. Additional avenues like gold mining funds and e-gold are options which are available as well.
We suggest looking broadly at the financial gold options as they don’t have various additional charges associated with physical gold or e-gold like wastage and making charges, hallmarking charges, GST, storage costs, etc.
Within financial gold, the SGB’s are the best option, given that they pay an annual interest of 2.5 per cent in addition to the gold returns and are tax-free if held till maturity of 8 years. Gold ETF’s and gold funds are suitable avenues for certain short term requirements as well as for the monthly SIP mode.
Finally, do not invest in gold seeing the last 12 months return and also do not invest in gold jewellery and call it an investment as you will not sell jewellery to rebalance your portfolio.
by Suraj Shroff, Founder of Infiniti Investments