Should you invest in gold this Dhanteras? Keep these important things in mind

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Updated: November 02, 2021 12:58 PM

Indians have an inseparable relationship with gold. And festivals like Diwali and Dhanteras become a perfect excuse to purchase gold. Should you buy it?

The delivery was executed between East India Securities Ltd and Senco Gold Ltd, the exchange said in a statement.The delivery was executed between East India Securities Ltd and Senco Gold Ltd, the exchange said in a statement.

With Diwali just around the corner and this (November 2) being the Dhanteras day, the yellow metal has again started gaining its buzz across the country. In fact, heavy buying in gold has been witnessed in the pre-Diwali season each year as bringing gold is also attached with religious emotions. And this seems to be an opportune time for buying or investing in the yellow metal as gold prices are likely to rise going ahead.

Gold prices have already seen a surge if we look at 2019 and 2020. Although gold has witnessed some underperformance in 2021 where prices have been trading between Rs 47,000 and 49,000 mark, but the demand for gold in India has bounced sharply from the lows seen during the pandemic in 2020, according to Motilal Oswal Financial Services, which expects gold prices to surge to Rs 52000-53000 over the next 12 months.

“Gold has been underperforming equities for the last 1-1.5 years mainly due to the aggressive bull market, and here I see a ‘Value-buy’ opportunity for investors as gold prices are down by nearly 14.30% from their peak of Rs 57,400 in August 2020,” says Akshat Garg, Manager-Research, Investica – a platform for investing in mutual funds.

Additionally, gold is also popular for its fundamental property of hedging against inflation and turbulence in financial markets as well. After the IL&FS crisis was unveiled in August 2018, investors took a flight to safety in gold, and the yellow metal delivered superior returns till the start of the Bull Run in India.

“Current elevated levels fused with continuous selling by FIIs in the last month is already mounting the anxiety for the people in Dalal Street and since gold as an asset class is inversely related with the equity during the period of stress, we recommend a 10-12 % allocation in gold at the portfolio level in these unconventional times,” adds Garg.

Physical Gold Vs Digital Gold?

However, what should you buy for better returns — physical gold or digital gold?

According to financial experts, purchasing gold jewellery as an investment is not a smart idea. Gold is usually looked upon as an easily bought and easily liquefiable asset that can be relied upon to appreciate well over time. However, gold jewellery comes with its own associated costs such as making charges, wastage, etc., that add up to the total cost of ownership. Moreover, while liquidating the jewellery, these costs are not recoverable.

Also, “it may not be very easy to sell jewellery for cash. Then again, gold by itself is an unproductive asset. A lump of gold will remain the same lump of gold and will never produce anything. Its value increases entirely on the belief that eventually someone else will pay more for it. On the other hand, if an equivalent amount of money is deployed in a business or any other productive economic activity, it will generate actual wealth and will grow larger in a very fundamental way,” says Adhil Shetty, CEO, Bankbazaar.com.

If you are looking to invest in gold, buying jewellery is not your only option. Several Mutual Fund houses closely track the value of gold and have gold-backed mutual funds.

“The RBI’s Sovereign Gold Bonds are also a good option if you are looking to stay invested for 8 years or more. These bonds are issued periodically, and their value increases exactly with gold. They also provide an extra interest of 2.5% per year. Unlike gold mutual funds, the gains from the gold bonds are tax-free. This makes it very similar to holding physical gold with a 2.5% a year bonus,” advises Shetty.

Some experts, however, say that buying gold for personal use or for investment purposes may just be fine, but you should not expect eye-popping returns.

Abhinav Angirish, Founder, Investonline.in, says, “Gold is still considered a hedge against inflation. The popularity of electronic gold has been on a steady rise. However, if you are expecting eye-popping returns from gold, you are in for a disappointment. Very few people know that even in gold, the returns vary depending upon the instruments. For example, Gold ETF and Sovereign Gold Bonds offer higher returns than physical gold. Ironically, gold jewellery or gold coins offer lower returns than digital gold. The reason being digital gold has lower transaction costs compared to physical gold.”

Other Investment Options

Indians have an inseparable relationship with gold. And festivals like Diwali and Dhanteras become a perfect excuse to purchase gold. However, for those who want higher returns, there are plenty of alternate investment options.

For instance, “if one is looking to invest for a period of five years or more, one can consider equity mutual funds. One can consider investing in Large-Caps since they experience lower volatility compared to Midcap and Smallcap funds. Equity mutual funds have delivered average returns ranging between 17% and 19% over the last decade. The unprecedented volatility that we saw during 2020 is quite rare. Even then the markets always find their true levels,” observes Angirish.

Due to the availability of various instruments, investing in gold can be a tricky affair. It is, therefore, highly advisable to seek the guidance of a qualified financial planner to avoid mistakes that could prove costly in the future.

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