Gold holds a great social and cultural significance in our Indian society. Gold is considered to be a precious metal attached with high value.
The value of gold can be traced from many centuries and is seen as a way to preserve wealth. It adds on to the wealth of an individual that passes to future generations on their wedding or during occasions.
There are various other ways and methods available for you to invest money. Equities, funds, bonds, etc are some investment options where you can earn dividend and interest. The equity market is highly uncertain and had seen a bad run in past few months.
On the other hand, gold prices have been on the rise. With the increase in global and economic uncertainty, gold prices are set to inch higher. This is because, gold prices raise during the downfall of the market as investors use it as hedge against uncertainty.
However, most financial advisors prevent their clients from taking too much exposure in gold. So, if you are thinking of investing in this precious metal then here is what you should know.
Should You Invest in Gold?
There is an old saying by Warren Buffet that investing in gold is stupid. Further, many other successful individuals have relatively same views.
Investing in gold won’t give you anything between now and then. Whereas have investments in other avenues might give you returns now and then.
If you invest in physical gold like bars, coins and jewelry, then the earning solely depends on the price of gold at the time of sale, i.e. either rising or falling.
In fact, there are always issues of storage, security and liquidity associated with the physical form of this precious metals.
By investing in equity, either directly or via mutual funds, you hold a part of the company and become entitled to dividend. An investment in fixed deposit means lending money which earns you interest. Investing in real estate will earn rental income for you.
But, with gold, it is just there in your investment, without generating any benefit or returns.
As, a traditional investment avenue, it is burdensome compared to other investment options like stocks, mutual funds or deposits. Moreover, gold prices are also volatile.
Any changes in the economy, due to Gross Domestic Product (GDP), inflation, war, political uncertainty, etc has an impact on the price of gold also, thus resulting in volatile swings.
Gold Return vs Equity Returns
On comparison with equity, it can be seen that gold is negatively proportionate to equity.
However, if you look at the returns in the long term perspective, then equity has done better than gold. Over the past 20 years, Sensex has given annualized returns of 12.3 percent, gold has earned 10.05 percent. In 10 years, equity has given 10.4 percent and gold 5.82 percent.
In 3 years, it is 10.7 percent from equity and 4.68 percent from gold. And in the last 1 year, the Sensex has risen 16.3 percent and gold by 6.44 percent.
The question that might arise in your head is that as equity is uncertain, shouldn’t gold be used to hedge? What if there is a repetition of the financial crisis of 2008-09?
So, the first thing to mark is that the financial crisis of 2008-09 is something which doesn’t happen quite often. This shouldn’t be the reason to invest in gold.
During that time, both equity and fixed income tanked, which is not a normal situation. Due to this reason, many investors switched to gold and thus its prices got pushed up.
The same will not happen soon. Moreover, in the long run, you would want your money to grow, but with gold, it doesn’t happen.
How Much Should You Invest in Gold?
If you want to invest in gold, remember it should comprise of a smaller part of your portfolio.
Financial planners suggest that if you have a regular income, then you should not put more than 2-5% of your portfolio in the precious metal.
And, if you don’t have a regular income, then you should not put more than 10% of your investment portfolio in gold.
Do You Have to Invest in Physical Gold?
Further, financial advisors suggest that for investment purpose, you should consider buying paper gold like gold exchange-traded funds, fund-of-funds, sovereign bonds, gold mutual funds and stocks, instead of physical gold.
This will be more cost effective as it reduces the insurance and security expenses and is more liquid as well.
Moreover, financial analysts say that you should not buy in gold for your investment. You should consider buying it only for future consumption. As, it won’t give you any returns, so keeping it as an investment is considered to be a useless option.
So, the crux that can be derived is that invest only a small portion of your investment in gold to diversify your portfolio You should invest in good equity mutual funds, systematic investment plans to prevent on directly investing in the market, if you are afraid of its volatile nature.
You can also keep your money aside in fixed deposits and other related products. All these options give you better returns on your money and help you take advantage of compounding.
It is the best for you to gain full knowledge before investing your money and keep tracking the proportion of each investment in your portfolio.
Disclaimer: The views expressed in this post are that of the author and not those of Groww