India is by far the major consumer of gold across the world. Whether it is a religious occasion, weddings, or while planning our children’s marriage, the yellow metal plays an important role. We use it both as jewellery and investment.
The price of gold has increased in the recent past. Since January 2018, the domestic price for 10 gms gold has increased from Rs 29,375 to Rs 31,080. This could prompt many of us to ask: Should I buy gold?
As an asset class, gold does not possess income earning capacity like Fixed Deposits, equities or any other investment product Gold is an idle asset class that does not provide or generate any recurring productive income. The price moves on the basis of demand and supply. Gold can, at best, be useful as a financial instrument that provides hedge against rising inflation and volatility.
Financial strategy for buying gold
We invest in investment products to meet our financial goals. Investing in gold should not be any different. Chances of meeting your financial goals are much higher when you have a defined set of targets and you execute them successfully. I would strongly suggest you to categorise your various life and financial goals, put a time line to achieve those financial targets, decide how much you need to save in order to achieve your goals and then choose the investment products to invest in.
So, focus on a goal-oriented investment planning rather than just investing in any product, say gold, purely on the basis of emotion or tradition. This practice can put a dent in your financial planning.
How much should you invest in gold
Since gold provides a hedge against inflation, it can help you during an emergency. So, treat it as an investment tool that will provide the required cushion. But at no point of time should your gold investment exceed more than 5-10% of your overall investment portfolio. The same also depends on your risk profiling and risk-taking capacity. So, your gold investment should never become the core of your financial planning.
When should you invest in gold
Once you formulate your gold buying strategy and decide how much amount to invest in it, the next question is whether you should invest in gold at the current price level. Over the last three to four years, returns from gold were negligible. And now, with the expected US rates hikes, returns from gold may remain more or less same because the price of gold globally is sensitive to US interest rates.
Till a few years ago, FDs used to be the most loved investment for Indians. But over the past few years, returns from FDs have been constantly declining. Today, it is around 6.5%, as against 9-10% a few years ago. Similarly, returns from Public Provident Fund (PPF) are also lower as the overall small savings rates are now reset every quarter. This also making many investors turn towards gold investment. But one should invest in gold for a long-term period only, as it is a cyclical investment tool. Avoid looking for instant returns.
How to buy gold
Avoid investing in physical gold unless you want to use it as jewellery as there will always be a problem of its safety and storage. You can invest in gold via gold Exchange Traded Funds (ETFs) or through mutual funds. Both these options are good as you would not incur any making charges. You can also sell or liquidate these investments instantly.
For gold ETFs , you need to have a demat account, but the same is not required if you are buying gold via mutual funds companies. Another option is Sovereign Gold Bonds (SGBs) that offer a variable interest (2 to 2.5%). These bonds also enjoy a capital gains tax exemption on maturity and you only need to pay tax on the interest earned every year. These bonds carry an eight-year maturity.
LIMITED SHINE
- Invest in gold only if it aligns with your financial goals
- Restrict gold investment to 5-10% of your financial portfolio
- Invest for the long term as it is a cyclical investment
- Choose ETFs, gold funds, soverign gold bonds over physical gold
The writer is Chief Gardener, Money Plant Consultancy
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