Gold is perceived to be an asset class which is dependable, acts as a hedge to the portfolio and whose value appreciates steadily over time to give the investor decent stable returns. This was supported by the historical data- Gold prices per 10 gms steadily rose from Rs. 1800 in 1981, Rs. 2500 in 1984, Rs. 3200 in 1990, Rs. 5000 in 1996, Rs.7000 in 2005, Rs. 12000 in 2008, Rs, 18000 in 2010, and Rs 26000 in 2011 before touching an all time high of over Rs. 32000 in November 2012.
For generations, gold has been one of the most popular and widely bought commodities in our country. Though gold is bought more as an object of beauty and for emotional reasons like gifting it to near and dear ones and preserving it for future generations, it offers many benefits when added to your portfolio as an investment.
- Gold provides effective portfolio diversification because of its negative co-relation with most other asset classes likes shares and fixed income products.
- It acts as a hedge against inflation.
- Protects the portfolio during times of political and economic turmoil.
- Hedge against currency risk.
How can you invest in Gold?
One can invest in Gold in either the physical form or as a financial asset.
- Gold Jewellery
- Gold coins
- Gold bars and biscuits
An exposure to Gold as a financial asset can be taken in the following ways –
- Gold Exchange Traded Funds – These can be bought and traded through a demat account on the stock exchange just like shares. ETFs track the price of gold and the gold ETFs in India follow the gold index in India. Each unit of an Exchange Traded Fund represents one gram of gold.
- Gold Mutual Funds – These are fund of funds schemes by Asset Management Companies which primarily invest in their own Gold ETFs. For example – Kotak Gold Fund invests most of its corpus in units of Kotak Gold ETF. Unlike ETFs, Gold Mutual Funds give the investor the facility of investing a small sum regularly through systematic investment plans.
- Gold Futures Contracts – These work like normal derivatives contracts with a limited contract period (maximum 3 months) and are traded in commodity exchanges like National Commodities Exchange (NCDEX) and Multi-Commodity Exchange (MCX).Here the investor can take large positions by just paying a percentage of the contract value, called the margin.
- Gold Deposit Schemes– These are like fixed deposits in gold and are offered by some banks. On Maturity, the investor gets back the same quantity of gold or its equivalent value, and is also paid periodic interest which is a pre-specified percentage of the value of gold deposited.
Physical gold or Financial gold?
Though people in India prefer buying gold in the physical form due to various reasons, it has a lot of disadvantages compared to owning it in the financial form-
- Physical gold suffers from the risk of loss through theft/burglary.
- It incurs costs as it requires storage in bank/safe deposit lockers.
- Selling it at any point in time could result in loss in value, wastage and exchange loss.
- Beyond the limit specified for jewellery for personal use, gold holding in the physical form incurs wealth tax. Gold Mutual Funds /deposit schemes are exempt from wealth tax.
- Gold in the non-physical form offers nomination facility wherein on the death of the investor, the proceeds can be transferred to the specified nominee. Physical gold does not have this facility.