Should you invest in gold? Yes, but only if it meets your financial goals
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, both as jewellery and investment.
Gold prices have risen 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 other investment products. 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 a financial instrument that provides hedge against rising inflation and volatility.
Strategy for buying gold
We invest in investment products to meet our financial goals. Investing in gold should not be any different. In order to achieve your financial goals, you should have a defined set of targets. 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.
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 can put a dent in your financial planning.
How much should you invest
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.
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When should you invest
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. Now, with the US expected to hike interest rates, returns from gold may remain more or less same. Till a few years ago, FDs were the preferred investment for Indians. But over the past few years FD returns have been constantly declining. Today, it is around 6.5%, as against 9-10% a few years ago. Similarly, returns from Public Provident Fund are also lower, as small savings rates are now reset every quarter. This also making many investors turn towards gold. 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 invest
Avoid investing in physical gold unless you want jewellery, due to the problem of safety and storage. You can invest in gold via gold Exchange Traded Funds (ETFs) or through mutual funds. In both these options you would not incur making charges. You can also sell or liquidate these investments instantly.
For gold ETFs, you will need a demat account, but not if you buy gold mutual funds. 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.
By Rishabh Parakh
(The writer is Chief Gardener, Money Plant Consultancy)
Source: DNA Money