Buying gold on the auspicious occasions has held a special emotional appeal in our lives. Dhanteras is one such occasion. However, over last few years, instead of buying bullion gold, many have shifted to buying gold online using well-regulated investment avenues such as gold exchange traded funds, gold savings funds and sovereign gold bonds (SGBs). Before we get into what’s the best way to buy gold this year, let’s look at some of key reasons why you should invest in gold.
Invest to hedge your portfolio
You need to invest in an asset class that has a low correlation with equities. Gold fits the bill.
Typically, gold prices rise when equities fall. There are signs of volatility, as the markets foresee risks such as reduction in liquidity, rising inflation, possibility of increase in interest rates, rising geo-political tensions and stretched trade talks between China and USA. “Though gold is not an ideal asset class for wealth creation, allocate some money to gold from a portfolio diversification point of view. It brings stability to your portfolio in volatile phases of financial markets,” says Pankaj Mathpal, Founder and Managing Director, Optima Money Managers.
Gold as a store of value
Inflation and taxes are the biggest enemies of investors. While equities are the best avenues to take on inflation, not everyone can invest in stocks. Some allocation to gold can be looked at to tackle inflation.
Gold is known to match or exceed inflation in the long term. Fixed-income investors tend to suffer more when the real rates (nominal rates less inflation) on their bond investments turn negative. At a time when the inflation is sticky in many parts of the world and the central bankers are not raising interest rates aggressively, experts advocate investments in gold. “Look at gold as a hedge against inflation. Do not include gold in your portfolio with the sole objective of generating returns,” says Amol Joshi, Founder of Planrupee Investment Services.
Past returns in gold have been erratic
Returns from gold can be lumpy and uneven. Vishal Dhawan, Founder and Chief Financial Planner, Plan Ahead Wealth Advisors, asks investors to look at gold’s past returns before investing. Over the last one year gold price has fallen 3.1 percent.
“Allocate 5-10 percent of your portfolio to gold. While investing in gold, do not forget to account for your existing investments in gold,” Dhawan adds.
How must you invest in gold?
Even if you are keen to buy physical gold, go for the bullion marketed by reputed refiners such as MMTC PAMP over a jeweller. Now, jewellery has a significant making charges component that can pull down your returns. “Keep consumption and investments separate when you are looking at gold. For investment purpose, paper gold works better,” says Amol Joshi.
Mutual funds
Eleven gold ETFs put together manage assets worth Rs 16,336 crore. Investors can buy and sell the units of gold ETFs on the stock exchanges. Over the last 10 years, gold ETFs have given 4.51 percent returns annually. Gold ETFs track the prices of gold and investors looking for exposure to gold prices can invest in them with a medium-term view. These funds charge 0.35-1.13 percent as fees. You need a demat account to invest in the units of gold ETFs.
For those investors without a demat account, gold saving funds investing in units of gold ETFs may work better. However, the expense ratio of these schemes are between 0.21 and 0.57 percent.
Sovereign gold bonds
For all those investors who have a long-term view on the gold investments in SGB make a lot of sense. These are issued by Reserve Bank of India on behalf of Government of India. The tenure is of eight years, however, after the end of fifth year, there is an option to sell it back to government. These bonds pay interest at the rate of 2.5 percent. SGB track the price of one gram gold and the investors are paid accordingly at the time of maturity.
The SGB issue closed on October 29, 2021 and the next one will open for subscription on November 29, 2021. But do not lose heart. You can buy a few of them on the stock exchanges. Investors should however note that these are not liquid in the secondary market. Selling them near fair value can be tough especially when the gold is out of favour. Invest only if you can hold the bonds till maturity.
Avoid Digital Gold this Dhanteras
This new avenue is catching up, especially with youngsters opting for app-based investing. Many platforms allow investments in digital gold. Investors can buy gold and make the payment online. The seller stores the gold in secured vaults on behalf of the investor. This allows buying and selling of gold round the clock and is seen by many as convenient means of investing in gold.
However, SEBI recently prohibited RIAs from advising on digital gold. Even stock brokers cannot sell it on exchange platforms. “Investors should always prefer well-regulated investment avenues while investing in various asset classes. That makes mutual funds and SGBs better vehicles for taking exposure to gold,” says Joshi.
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