Ask any Indian family what their favourite and safest investment asset is and the answer most probably would be ‘Gold’. This asset is passed down as heirloom jewellery, tucked away in lockers as coins and bars, or traded in digital form. But why exactly is gold such a popular choice? And more importantly, as someone looking to add this precious metal to their investment portfolio, how can you add it to your portfolio in a way that aligns with your financial goals? Let’s understand this in detail.
Why Gold?
It is more than just a shiny metal, gold investments are a multifaceted asset that plays many roles in your portfolio, such as a:
1) Diversifier: Gold holds the ability to mitigate your losses during times of market volatility. One can think of it as a safety net when the stock market crashes or if any global tension escalates which directly or indirectly affects your economy.
2) Inflation-Hedge: Gold has, over time, outperformed fiat currencies such as ‘Rupee’ in India. This helps maintain the reputation of this metal as a hedge against inflation and is kept in the good corners of your portfolio.
3) Can Be A Liquid Asset: Though it does have its constraints, unlike real estate or some long-term investments, gold is relatively easier to buy and sell without losing much value.
3) A Historical Performer: Gold trends show that the metal gains in value over a long period of time. According to World Gold Council analysis, “Adding between 4 per cent and 15 per cent in gold to hypothetical average portfolios over the past decade, depending on the composition and the region, would have increased risk-adjusted returns (for investors).”
For Indian investors though, the love for gold goes beyond all these practicalities because of its cultural, emotional, and deeply ingrained in our traditions. However, when it comes to investing, gold has more than just sentimental value to contribute.
Here are different ways in which you can add gold to your investment portfolio:
1) Physical Gold: Bars, Coins, and Jewellery
This is the most traditional way of owning gold wherein people buy gold as ‘jewellery’, not for investment but as a family heirloom, gift or for traditional or ritualistic purposes. Physical investment in gold extends to owning investment-grade bars and coins, typically with 22-karat or 24-karat purity, which are sold by banks and certified/reputed dealers. However, buying physical gold comes with the challenge of storage and some additional costs like insurance and security.
If you’re going this route, make sure to check for the BIS hallmark and the six-digit Hallmark Unique Identification (HUID) code to verify purity. This is important to not fall into any gold scam or impure metal purchase.
2) Gold ETFs: A Trending Option
Gold Exchange-Traded Funds (ETFs) are increasingly becoming popular among urban investors. Gold ETFs are instruments that track the performance of gold and invest in gold by either purchasing bullion or futures contracts.
For investors, this option comes without any worry of storage because it’s done in electronic form and tracked through a Demat account.
A few major advantages of investing in Gold ETFs include its high liquidity factor, meaning you can buy or sell it with ease on the stock exchange. Also, you don’t have to worry about any storage or insurance concerns.
Moreover, the performance of Gold ETFs usually mirrors the gold spot price, so your investment grows as gold prices rise. However, note that any downturn in the prices will also affect your portfolio.
For those looking to get a different exposure in the stock market, this could be a convenient option.
3) Gold Mutual Funds
You can also invest in gold via the route of mutual funds, this is another convenient way to invest in this asset without having to purchase the commodity in its physical form.
Gold funds, categorised under ‘open-ended-investment’, are a type of mutual funds that directly (or indirectly) invest in gold reserves. The investments here are typically made on stocks of gold-producing and distributing syndicates, physical gold, and stocks of mining companies.
Since the underlying asset is held in the form of physical gold, its value is directly dependent on the price of this precious metal.
4) Digital Gold: Urban Addition
As young investors increasingly tap into investment avenues that are both new and technologically advanced, ‘Digital gold’ has penetrated the market as a desirable option for investing in this asset.
This age cohort is choosing digital gold largely driven by the convenience and flexibility that it offers. An investor can start purchasing digital gold with as little as 1 Rupee through many fintech platforms.
However, if you are considering digital gold, learn about the various risks and cons involved with this investment, the most notable being the absence of any ‘regulatory body’ for this investment. This supervision gap may result in inconsistent business practices, diminished responsibility, and risk to investors and customers.
5) Sovereign Gold Bonds (SGBs)
In India, Sovereign Gold Bonds (SGBs) could be the best bet for those looking for a steady and long-term investment. SGBs are issued by the Reserve Bank of India (RBI) on behalf of the government, and the bonds offer some unique propositions, such as;
- An annual interest of 2.5 per cent on investment
- No storage or insurance hassle (because you don’t physically hold the gold)
- Tax-free returns upon maturity if you hold the bond till the end of its 8-year term (though an early exit is allowed after the 5th year)
These bonds are denominated in units of grams of gold with a basic unit of 1 gram. Moreover, the maximum investment a retail investor can make is 4 kg.
One limitation of SGBs is their liquidity factor because, unlike ETFs, you cannot sell SGBs as easily during their lock-in period.
Key Considerations Before You Invest In Gold:
Gold investments are attractive, however, it should be done only if essentially align with your investment and financial goals. Here are a few tips to start with;
Decide your purpose: What is your purpose to invest in gold? Is it wealth preservation, portfolio diversification, or short-term liquidity? A goal will always guide you better towards a good choice.
What are the costs? Technically, no investment comes without a zero cost. Even with gold, check what are the associated costs of this investment, it could be storage, insurance, or premium charges.
Verify quality: Don’t forget to check for hallmarks and certifications, especially for physical gold since ensuring the purchase of pure gold should be your prime concern.
The Bottom Line
Gold has historically stood the test of time as a safe haven asset, a hedge against inflation, and a reliable store value. Whether you are a conservative investor looking for security or a seasoned one seeking portfolio diversification, there’s a way to incorporate gold into your financial plan.
