In the present situation when the Indian and the world economy are going through a difficult phase, having gold in your portfolio can provide you a cushion against heightened market risks and uncertainties.
An investor’s portfolio may not look well-balanced if it doesn’t consist of gold. Historically, the precious yellow metal is seen as a hedge against uncertainty as well as a tool to counter inflation. In the present situation when the Indian and the world economy are going through a difficult phase, having gold in your portfolio can provide you a cushion against heightened market risks and uncertainties.
Now, there are various gold instruments available in the market, but you should select the one that suits you the best. Let’s check out some crucial aspects related to gold investments to help you make informed decisions.
The prices* of gold have almost doubled in 5 years
The prices of gold have climbed close to the Rs 50000/10-gram mark in the last few days. The spot gold rate was Rs 49175/10-gram on July 9, 2020, while it was Rs 24562/10-gram on August 6, 2015 – meaning the gold prices have almost doubled in the last 5 years. Also, the lowest price of gold in 2019 was Rs 31220/10-gram showing the prices have jumped by approximately 60% in almost a year. The reason behind this sudden jump in the gold prices is the continuous increase in risks in the domestic as well as the global markets. On January 1, 2020, the price of gold was Rs 38977/10-gram, but now it is hovering around the Rs 50000 mark triggered by the economic fallout of the coronavirus pandemic in the last six months. If things do not normalise in the coming months, gold may witness further price hikes.
The various options to invest in gold
Now the upward trend in gold prices makes the yellow metal a viable investment avenue with various investment options available in the market. Now, many prefer investing in physical gold like gold ornaments, bullions, and coins, but those might be a slightly risky proposition in these times of the pandemic. Plus, one could never rule out the concerns over purity while additional expenses related to storage of gold, making charges and GST on making charges could further diminish the returns. As far as digital gold investment options are concerned, gold ETFs are good because they can be kept in the dematerialised form. They are highly liquid as well, but there are no tax benefits if you stay invested in them for a very long time. The long-term capital gains from gold ETFs are taxed at a 20% rate with indexation benefit.
On the other hand, another digital gold investment, the RBI-issued Sovereign Gold Bonds (SGBs) offer a 2.5% p.a. interest on the face value of the gold which is not available in other gold investment products. On redemption, the capital gains on SGBs are exempted from tax while only the interest is taxed according to the provisions of the I-T Act. This is another factor that you miss in other gold investment instruments. SGBs are listed on the stock exchange and investors can sell them in the secondary markets whenever they require liquidity.
What’s the best gold investment strategy?
Instead of investing in gold with a lump-sum amount, you should go for a staggered investment strategy. The price of gold is reaching record-highs in India currently, but if you invest in gold in lump-sum and the prices fall, you may suffer losses. It’s better to digitally purchase gold investing a fixed amount every month or quarter. This will help you to accumulate gold without putting excessive liquidity pressure on your pocket.
In the long-term, your gold investments would enjoy the benefit of rupee cost averaging. You may invest in SGBs through the stock market or subscribe to the SGB issues launched by the RBI from time to time. In fact, the FY20-21 Series IV tranche concluded on July 10, 2020, with an issue price of Rs 4852 per gram and an additional discount of Rs 50 per gram for online subscribers who paid digitally. The next tranche (FY20-21 Series V) could be subscribed from August 3, 2020, until August 7, 2020.
How much should you invest in gold?
Every investment product has a purpose. Some are meant to maximise profits while others are meant to ensure a certain level of stability. Likewise, different types of investments collectively result in an investing strategy to achieve your financial goals within definite time-frames while keeping the investment risk under control. As such, gold should be used in sync with your financial goals as part of your optimal investment diversification strategy which is devised factoring in your returns expectations, risk appetite, age, income, and liquidity requirements.
While you should not miss the investment opportunity in gold, you should also ideally limit your total gold allocation to a maximum of 10% of your portfolio’s value as the prices of the yellow metal tend to flat-line over long periods of time despite the occasional upward trends. Having an appropriate quantity of gold in your portfolio can allow it more stability while ensuring diversity amid adverse market conditions.
*All gold prices from mcxindia.com
(The author is CEO, BankBazaar.com)