Why this financial advisor advises against buying gold on Akshaya Tritiya

Representative Image

What is it about Akshaya Tritiya and gold?

An age-old ritual associated with the auspicious day of Akshaya Tritiya is of buying physical gold. Buying gold and bringing it home is a way of welcoming Lakshmi, the goddess of wealth and good fortune, to your house.

The compulsion to buy gold, despite the metal’s steep price, and the expenses and risks involved, demonstrate some clear flaws in the way investors or buyers think. Our generation seems to be playing a broken telephone game with previous generations by investing in gold. The words were “wealth creation” and “prosperity” when the game started. Today’s generation hears “gold”. And the fault here is not entirely ours.

Also read | Selling old gold jewellery? Getting cash in return is difficult

A fair share of the blame can be transferred to smart marketing agencies and their tactical gimmicks associating gold as the sole vehicle of welcoming goddess Laxmi home. We have become used to being fed the line that “gold is the best investment” for years now. Just like owning a home is part of the American dream, owning gold is part of the Indian dream.

India's love of gold is not new. It’s almost a religion. Ajay Mitra of the World Gold Council once famously: "If India sneezes, the gold industry will catch a cold."

We agree that buying gold is not a mere vanity but an investment and empowers you with financial security. But it is difficult to believe it is the best investment for wealth creation and prosperity. Allow us to demonstrate the notion, “All that glitters is not gold” to you.

Why physical gold jewellery as an investment does not make sense
Making charges: Making charges, often called wastages, are added to the final cost of the jewellery, excluding the 3% Goods and Services Tax (GST). The more delicate and intricate the gold jewellery design, the higher will be the making charges.

Locker charges: Banks charge anything between ₹1,200 and Rs22,000 excluding GST as an advance rental fee annually for storing jewellery. And also, every time you need your jewellery, you need to rush to your bank locker. Which, again, puts a big question mark on the safety of the gold.

No passive income: Many financial experts, including veterans like Warren Buffet, believe that investments should create revenue. Gold does not meet this criterion because it does not generate any value while it is owned. Equities, for example, allow you to have a consistent passive income in the form of dividends.

Gold is less liquid: Gold is less liquid than other investment. That apart, gold jewellery has an emotional value more than the economic one. Thus, the call to sell jewellery does not come easy. And when you decide to sell, it’s not easy to dispose of.

Dependence on international markets: Gold prices fluctuate and they are volatile. They are highly dependent on international markets. The US dollar plays a vital role in gold prices. Further factors like demand and supply, inflation, crises, and interest rates also play a role.

Taxation: Gold sold after three years is considered long-term, and long-term capital gains are taxed at 20%. Short-term capital gains are added to your income and taxed according to your tax bracket.

Also read | Explained: All about how gold ETFs give investors the purest yellow metal

Why equities work better than gold?A quality-oriented equity portfolio overcomes almost all of the above drawbacks of gold. The pandemic shift across the global economy has led many investors to take a deeper look at the landscape of “quality”-oriented investments.

Companies that form part of this quality portfolio have management credibility and come with solid and stable balance sheets. But which are these companies? We ran a simple filter:

·      Companies with a market capitalization of over ₹1,000 crore, and,
·      At least 10 years’ of existence, and,
·      Profit margin of at least 10 percent and Return on Capital Employed (ROCE) of at least 14 percent over the last 10 years

A quality portfolio is less volatile, gives downward protection, and has low risk over the long term. No matter what, the chances of going burst are minimal. It also gives you better returns over a period of time.

Here’s how to look for companies to build yourself a quality portfolio:

·      Big franchises with sustainable long-term business models
·      Displaying a credible and long track record of profitability
·      Robust predictable cash flows
·      Justifiable high return on capital
·      Powerful growth potential and economic moat
·      Honest and capable management
·      Healthy profit margins and solid balance sheets

Such a portfolio tends to outperform gold over a longer period of time <see table>

From Akshay Tritiya 2012 to Akshay Tritiya 2022, equities have outperformed gold

As Swami Vivekananda once said: "To believe blindly is to degenerate the human soul. Be an atheist if you want, but do not believe in anything unquestioningly."