For centuries gold has been given great importance not only as an asset that is passed over to generations but also as an investment option. However, since April, gold rate in India has been fluctuating within a range of ₹31,000 - ₹32,299. For many people, current gold prices are too high to invest as at such a time the returns can be meagre. The market state will not remain constant but it has forced people to question whether the yellow metal is worthy of the investment or not.
As an asset class, gold neither promises fixed returns like fixed deposits nor it possess income earning capacity like equities or other market-linked investment instruments. However, it instils a sense of security and confidence among investors to cope with market uncertainties and financial distress. Therefore, most financial advisors recommend people to keep at least about 10% of gold in their investment portfolio. If you need more reasons to convince yourself to invest in the yellow metal, here are a few of them:
1. It provides protection against inflation and other market uncertainties.
At the time of inflation, investors fear equity and debt securities as at such times these investment options can be a bit more expensive than usual and are also likely to underperform. On the other hand, gold has historically proven its worth during high inflationary periods. Even in India, where every saving instrument may not offer returns, gold fares well even when the inflation rate beats the interest rates. And if we talk about returns, then the annualised return of gold over ten years has been quite higher than that of inflation.
2. It provides risk-adjusted decent returns
One of the major reasons why most certified investment advisors recommend people to include gold assets in their portfolios is because it helps in reducing the overall risk of the portfolio while maximizing returns. With proper asset allocation, the metal manages to counterbalance any shortcoming or risk from bonds yields or equities. Since these three assets, i.e., debt, gold and equity, do not move in tandem, putting them together in right proportions in a portfolio can help in reducing the overall volatility and risk. So, for instance, if equities fall, gold will prevail, thus offsetting any downside risk and protecting your overall interest.
3. It protects investor’s interests in case of major drop in a country’s currency value
A country’s currency and gold rates are inter-related. For instance, when the US dollars or reserve currency falls, the gold rates increase. So when local currency of an economy takes a hit due to macro-economic factors such as geo-political tensions, etc., gold helps in reducing its impact. It acts as a hedge against such currency value erosions and safeguards investors’ interests.
4. It offers financial comfort at the time of financial distress
Many investors use gold at the time of financial trouble. And not just people even nations use gold to get out of a financial trouble. For instance, by the end of 1990’s, when India’s balance of payments situation had deteriorated sharply, the country had raised the loan amount of $405 million against the gold from its national reserves. The metal came to rescue India when the country itself was in a big financial distress. Similarly, people who invest in gold in any form too sell or pledge it in times of financial crisis.
5. It helps in reducing risks while creating wealth
Gold as an investment offers two major benefits to the investors. The first benefit is that it helps in reducing most of the market-related risks. As we have discussed in previous points, it protects your interests from inflation, currency value-erosion and so on. The second benefit that the metal offers is of wealth creation. Even if there are no geo political tensions or economic crisis, it helps in building wealth by giving you decent returns in the long term. It also helps in mitigating possible risks associated with other investment options, thus, preventing you from big losses. For instance, if there is a political shock, gold as investment will protect you from capital losses from equities.
Different Ways to Invest in Gold
We have several ways through which we can invest in gold. Some of the gold-related instruments are given as follows:
Physical Gold: Till a few decades back, physical gold, i.e., in the form of ornaments was the only way one could invest in gold. Even now people continue to do so but it is not a recommended practise from an investment point of view. This is because the investment option has its share of disadvantages such as threat of theft when stored in home or costs borne for storing gold in a bank locker.
Sovereign Gold Bonds (SGB): SGB is a government scheme that was launched with an objective to provide a more cost effective alternative to physical gold. RBI periodically issues this bond in the denominations of 1g of gold and its multiples. The minimum and maximum limit of subscription for individuals is 1g and 4 kg respectively. Whatever amount you choose to invest in the scheme will bear interest at the rate of 2.5% p.a. The interest amount generated will be credited semi-annually to your account. Another good thing about this investment option is that at the time of redemption, you will receive the market price of the gold held. Moreover, the bonds can also be used as collaterals to get loans.
Besides all these benefits, there is one disadvantage that it has low liquidity. The tenure of these bonds is 8 years and can be reclaimed prematurely only on coupon payment dates after 5 years from the date of issue.
Gold ETFs: The prices of gold exchange traded funds (ETFs) are based on physical gold rates in India. It can be bought or sold like stocks at market prices. Each unit of gold ETF equals to 1gm of gold. To trade in gold ETFs, you need a trading account with stock brokers and a demat account to hold those ETFs.
Moreover, these funds come with their own set of drawbacks such as it includes additional investment costs like brokerage charges, annual charges, etc. Even though the funds can be traded anytime during the market hours, their low trading volumes may greatly affect its market rates, making them trade lower even than their own NAV.
Gold fund of funds: These are open-ended MFs that invest in gold ETFs. It is highly liquid and can be bought and cashed at NAV (net asset value) during any business day. The minimum amount that you can invest in it is ₹1000 and the additional investment can be made in as less as ₹100. Also, you do not need trading and demat accounts to trade in these units.
E-gold: E-gold or electronic gold is issued by National Spot Exchange Limited (NSEL). It allows you to invest in gold in small denominations, i.e., in the units of 1g of gold and hold it in demat form. It can be traded only in NSEL through its member brokers. It can be changed into gold coin or bar.