In this episode we are going to look at gold, why should we invest in it, how should we invest in it, and what should we not do while investing it in?
Hrishi K: Hello listeners, and welcome to another episode of NSE Presents: Invest – O - Cast (An exclusive investor podcast) Powered by MoneyControl. My name is Hrishi K, I am your host and this podcast is all about getting your money to make better investments for you - in the new financial year.
Today’s podcast is going to be about an investment every Indian has at their home. It doesn’t matter if you are rich or poor; every one of us has this in some small measure and pleasure. Most Indian families literally wear this investment as a badge of pride and honor. That’s right, we’re talking about gold here, and today we are going to take a look at the dos and don’ts for investing in gold.
Gold keeps making news all the time. It’s either in the news because sales have spiked up on account of some festival or sales have spiked up because of wedding season or recently, when gold sales went up because of demonetization.
That’s another reason why gold prices go up: When people think that the stock markets are going to fall. So, I tell you what just for a lark, I checked out gold prices since the start of this year. In January, just 45 days ago, gold was trading at almost Rs. 32,000/- per ten grams. On Friday, February 15th, it was almost Rs. 33,400/. That got my spider-sense tingling, and I decided to call in an expert to educate us on gold and how can we invest in it.
National Stock Exchange (NSE) with the help of Invest – O – Cast (an exclusive investor podcast) Powered by Moneycontrol is committed to break the limitations of geographical boundaries and reach investors across the country. In today’s episode we are going to look at gold, why should we invest in it, how should we invest in it, and what should we not do while investing it in? Gold is not just a pretty face, you know!
Our guest for today is making his second appearance on the show. Harsh Roongta is a Chartered Accountant by qualification and SEBI registered investment advisor by profession, a veteran in the personal finance industry he has conducted more than 50 investor awareness programs across the country. He co-founded ‘Apnapaisa’ in 2000, in partnership with other accomplished industry professionals. Harsh has been a columnist in leading Indian newspapers. He also routinely answers queries on popular TV channels and websites.
Welcome back on to the show Harsh. It’s an absolute pleasure to have you back. I really enjoyed the last recording with you.
Harsh Roongta: I did too! It is a pleasure Hrishi.
Hrishi K: Let’s start with the sudden rise in the price of gold. Does this theory really hold water: That gold goes up when stock markets are about to go down. Should we be looking at investing in gold now Harsh?
Harsh Roongta: So 2 parts to that questions one is does gold is it inversely related to the stock markets and is this a good time to buy gold. The first part to certain extent gold is seen as a safe investment so when risk awareness rises in the market there is a rise in demand for gold and price goes up. Generally today in the world we see and including in India little bit of risk awareness and therefore you see a spike up in the price of gold, so yes it is inversely related to a certain extent but not always. Second is this a right time to buy gold? I think this is the same class of question is this the right time to buy equity, I think the real question should be what portion of your investment should be in gold and what portion should be in equity and for assets like equity and assets like gold when the prices go up and down one must invest systematically, one must not try to time it. I don’t think anybody can ever time it to perfection, so gold definitely you should have some portion of your portfolio in gold in my opinion a small portion 5% maybe if somebody is very bullish may be 10% so it should be part of your portfolio and it should be built systematically.
Hrishi K: Now most Indians buy gold, invest in gold out of emotion there is no doubt that but the question remains is that the right way to go about it Harsh.
Harsh Roongta: So I think when you see emotional buying you talking of gold being bought for the purpose of social occasions, for gifting it to loved ones,on the occasion of marriage or other such social occasion I would not really call that investing. That’s consumption; because one because I think the price of that particular piece of jewelry is not just going to be gold inherent price but also the emotions that you invest in it so I think over time when you are not going to sell it, so I think very clearly that is not an investment and no investment should be emotional. So I think we should segregate consumption of gold and investment in gold that is what I would strongly recommend.
Hrishi K: What is Gold ETF & after explaining what a Gold ETF is I would like you Harsh to take us to steps we should take while investing in Gold ETF’s?
Harsh Roongta: So I think Gold ETFs is where number of investors get together. I mean a fund manager gets together, number of investors aggregate their investments and buys gold on their behalf. So now if you were to go out and buy 20 grams of gold versus if you were to give that money to a fund manager who aggregates it into 20 kilos, the kind of cost associated with buying, the cost associated with storage, cost associated with insurance all of these costs come down and plus the fund manager is also able to use the facility of putting it into the gold monetization scheme so some income can be generated out of that I think because all this cost come down and some income can be generated a Gold ETF is far better investment than buying physical gold.
Hrishi K: So what are the steps which one should take while investing in Gold ETFs?
Harsh Roongta: So Gold ETFs by their definition are available only on the stock exchange which you just like you would buy a share through your account with the broker you can buy Gold ETF and it will get credited in terms of grams into your Demat account. The other way to get an exposure to Gold ETFs is to actually do a systematic investment in gold fund probably from the same fund house which in turn buys the Gold ETF, so you may incur a small double cost but that gold fund allows you to invest systematically in gold that is the advantage of investing through a gold fund into an ETF rather than directly buying a Gold ETF.
Hrishi K: You are listening to National Stock Exchange (NSE) presents Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl and through this podcast we committed to break the limitations of geographical boundaries and reach investors across the country. Still speaking to Harsh Roongta on smart ways to invest in gold. Just to round up the discussion on Gold ETFs what kind of people should consider doing a SIP into gold and what kind of people should just go and buy an ETF directly?
Harsh Roongta: So I think every common investor as I said Gold is a commodity whose price fluctuates. Anything where the price fluctuates a systematic investment makes sense and therefore I think most retail investors who are not well versed with how the gold price is behave would do very well to buy it systematically even though it incurs a slightly additional cost and I would encourage investors to buy it through a SIP in a gold fund that will in turn buy an ETF however if you are a large investor you have access to specialized knowledge you could buy the Gold ETF directly. There are other things that you could do I mean there are other financial instruments; you could buy a gold bond for example. The advantage of a Gold bond is that you get interest on the gold bond plus any appreciation in the value of the gold, underlying gold is free from tax. On maturity it is completely free from tax so I think you get about 2 and a half percent interest plus the maturity value is tax free so I think those are the 2 advantages of buying a gold bond.
Hrishi K: Those are some really helpful answers. Now Harsh let’s hop over to the other side now. What are the most common mistakes that people make while investing in gold. Or let me re-phrase the sentence what are the things people should NOT do while making gold investments?
Harsh Roongta: So one thing is the biggest mistake that people make is confusing consumption with investment. When you buy jewelry the moment you take it out of the showroom 25% value is gone, you buy it come out of the shop then you go back to the shopkeeper and say I want to sell this back to you, you would only get 75% of whatever value you paid about an hour ago. So I think anything that looses 25% value can’t really be an investment. Its a consumption that may not cost as much as it appears. I think that is the one thing that I would say you should never do. Second even when you buy it as an investment, then rather than buying physical gold you now have various financial instruments as I said we have already spoken about the index fund going into an ETF, ETF directly, gold bonds and you also have the gold monetization scheme I think all these are financial instrument that allows you an income while you are investing Gold and also give you tax benefit, so I think these are the reason why you should look at financial instruments rather than look at physical gold.
Hrishi K: I am going to ask you a contrarian question now Harsh. Warren Buffett was the world’s most looked-up to person when it comes to investing people keep quoting his examples, you know his quotations are so popular all over the world he doesn’t believe in gold as an investment. But India is a whole different cattle of fish. Why should we?
Harsh Roongta: So not just India, China and almost entire Asia. I mean India and China together constitutes the largest importers of gold anywhere in the world. So what is the value of gold based on? I think the inherent use of gold in industrial manufacturing is rather limited. The value of gold arises from the fact that it is a natural product it cannot be manufactured, there is a finite quantity, you are able to assay it you are able to find out if a particular piece of gold is a pure gold or not. And fourth because people have faith in it right? So it all arises the value of gold arises from its finite quantity and the faith that people have in it and this faith has to continue for the value to, you know increase or whatever is the reason and I think that is where the issue arises that you have to depend on the collective faith that people have in a instrument. If something were to happen, tomorrow if a technology was evolved an alchemy formula become available which converted lead into gold the value of gold would be lost , so I think that is one reason why probably a great investor like Warren Buffet doesn’t believe in gold. As far as India is concerned I would say given the social significance that we are attached I think some bit to gold and 5% in my opinion 10% maximum, some part of your portfolio should be in gold.
Hrishi K: I like that example of alchemy and magic very ‘Harry Potteresk’ till we find the formula or turning lead to gold, very well put. Well Harsh there shining a light on gold for us is answered a lot of questions that I am sure that must have given you a lot more clarity.It's now time for ‘Wisdom in the Bank’, the segment on this show that does a quick recap of all the points that our guest has spoken about. Harsh Roongta said:
- Don’t try and time investing in gold. The way to buy gold is to buy it systematically, if you want to.
- Distinguish between gold as an investment and gold as a tradition or emotion, it’s difficult to value a family allure
- In an ETF the number of investors aggregates their investments and the fund manager buys gold on their behalf, therefore the cost of each investor is low.
- Don’t treat jewelry as an investment anything that depreciates by 25% when it comes out of the showroom is ‘consumption’ not an ‘investment’.
- When you exchange old for new as far as gold is concerned you are liable to pay taxes. It might come back to haunt you.
- The utilitarian value of gold is limited people believe in it and that imparts its value. If the belief in gold goes away the value goes away.
Harsh it’s been an absolute pleasure having you on the show today. I think the knowledge and tips that you have given us is going to be of great use not just to our listeners but me too. It’s wonderful to have guests like you coming on simplifying investing techniques for those of us who are not well-versed with finance. Thank you very much.
Harsh Roongta: It was a pleasure Hrishi.
There you have it! Gold is a metal that is part of Indian culture for thousands of years now and we have just gotten a completely new perspective on it. Courtesy - Harsh Roongta.
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