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Gold as an investment : Glittery or Dull?

Gold as an investment

        Over the past two months or so, stock markets are having a tough time holding it together. There have been dips and more dips. Fixed income products haven’t preformed that good either. Also, current status of global and domestic economies is mostly ‘It’s Complicated’. The whole point of my incoherent sounding above statements is that they make up for a scenario similar to the ones in the past where the shining metal, aka Gold have seen price jumps. Gold prices are highly volatile. Even during steady economy, it’s prices swing. And if the time is of some economic uncertainty like war, political problems, crude prices etc, those swings become violent. Normally during such times, gold prices go up as people do what they have done traditionally, turn towards gold to have a safety against uncertainty. People here buy way more gold than what the country produces domestically, resulting in India being one of the largest importers of gold. Gold holds immense importance among Indians. Here, it is more than just an investment avenue. Mostly, it is bought in the form of jewellery during festive seasons, marriages, religious processions etc. A person wouldn’t normally think about future returns while buying jewellery for his daughter’s marriage. Similarly, a woman wouldn’t think that either while gifting a ring to her husband. Most of these theple don’t buy gold to sell it later for a profit. Gold here is passed from one generation to another in the form of gifts and inheritance. So Indians buying gold is more like a socio-cultural ritual than just an investment decision. But, what if you decided to include gold to your investment portfolio? As seen above, gold prices tend to go higher in the time of economic uncertainty. During such times, when paper currency loses people’s faith, gold becomes safe haven for parking of their money. But such scenario doesn’t stay for a long period of time. Measures are taken to bring the economy back on track and to restore people’s faith in the national currency. With such a volatile nature of gold, one should not invest major portion of his portfolio into gold. Ok, then the question will be, how much? (To clarify, by gold investment, I mean buying gold bullion, gold bonds etc. and not jewellery). Well, gold on it’s own doesn’t guarantee you any returns for any term. On the other hand, equities have outperformed almost anything in the long term. Even debt and mixed equities are good in medium to long term. So, I don’t think it’s a good idea to invest into gold for those terms. There is a way though in case you still choose long term gold investment and if you don’t mind your funds getting locked for 8-10 years. It’s govt’s Sovereign Gold Bonds scheme. In addition to price appreciation (if any), they give you 2.5 percent annual interest on maturity. Also, any gains accrued are tax free. Remember, interest and tax free gains portions of the scheme are govt’s offering to collect funds from you and make the scheme somewhat attractive. Suppose, gold prices dont increase during the scheme, then all you will be getting is 2.5 percent return on your blocked investment. Even a fixed deposit would have offered better returns and that too after deducting TDS. Alternatively, you can opt to invest in gold etfs or bullion coins or bars or certificate gold. Their returns too are linked to the price movement of physical gold. In any case, I would advise against investing more than 6-7 percent of your entire portfolio into gold. There is another option too. We know that gold is liquid asset, right? This can make it a good candidate to become a part of an Emergency Fund. EF is the money equivalent to your 5-6 months income put aside for emergencies. You may put only 10-15 percent of your EF into gold to make sure any nagative returns in gold doesn’t affect your EF too much adversely. One more thing. Gold doesn’t add value to economy like any company does when it grows. When you buy a stock, you become a part owner of that company, get dividend and so on. When you purchase gold as an investment, to get profit,you just hope that someone will be willing to pay higher in future and that’s it. There is no actual value addition to its own worth. Increase in gold’s value doesn’t help country’s economy in anyway. Besides, you can think your current holding of ornaments as an investment in gold sans let go of making charges and adjust other gold investments ercordingly. Gold investment is volatile in nature and provides profit during certain periods of time which are not consistent or future proof. During rest of the time, when the economy grows or remains stable, there are better investment avenues available like stocks and MFs which are likely to provide far better returns. Therefore, gold Investing with reasonable logic will help save yourself from unnecessary blocking of your money as well as better return prospects for your investment. That’s it for this post. Wishing you all a very happy Diwali and an upcoming year full of positive financial surprises. Will be back soon…

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