Gold's beauty and appeal have successfully enticed people from all over the world including India. Indian obsession with gold has only grown stronger over time. India accounts for the majority of world gold consumption. Despite the fact that a large number of Indian lives on a meagre income, they find methods to purchase gold and make it a vital part of their life, regardless of gold rates.
Why Gold should be in your portfolio?
As Indians, we have seen gold in a unique way rather than as an investment vehicle, which we inherited from our ancestors or parents. However, with time, our view of gold has changed. Now, we also see gold as an investment.
In an ever-changing global economy, it would be beneficial to diversify the portfolio using gold as an inflation hedge. The price of gold will rise in reaction to specific occurrences that lower the value of equities and bonds. It aids in the protection of your wealth against bad stock market swings. You could buy gold as a long-term investment.
In times of trouble or distress, such as natural disasters, financial crises, economic crises, or government failures, gold serves as insurance. Even if no major event occurs, a prolonged slowdown or inflation increase in the economy can cause contagion in financial markets, depreciating the local currency, bonds, and so on. In such cases, the perceived value of gold rises.
There are 3 Gold Investment Alternatives You Can Look For If You Want To Invest In Gold. These are Sovereign Gold Bonds (SGBs), Gold Exchange Traded Fund (ETF) or Physical Gold.
Sovereign Gold Bonds (SGBs):
SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India in multiples of one gram of gold, and it is traded on the market.
While these bondholders do not possess physical gold, the value of a bond is affected by changes in the value of gold.
It provides market returns that are related to the price of gold. SGBs pay interest at a rate of 2.50 per cent (fixed rate) per annum on the initial investment.
The interest is paid semi-annually. Because they are backed by a government guarantee, these bonds can be used as collateral for loans as well.
Since SGBs have a minimum holding duration of 5 years, this becomes suitable for investors with modest liquidity demands and a lengthy time horizon. SGBs can be purchased by an investor who has no liquidity demands for the next five years. SGB holders are reimbursed with an additional 2.5 per cent interest together with the change in the value of a bond throughout this holding term.
Gold funds are a kind of open-ended mutual funds that invest in Gold ETF units. The market price of gold is influenced by its price changes. Its returns, like those of SGB, are tied to the market price of gold. Gold ETFs are mutual funds that track the domestic price of actual gold. When compared to actual gold, ETFs help avoid the inconveniences of storage and paying charges.
The distinction here is that the ETF management holds physical gold in the government treasury on behalf of the investors. To invest in gold via ETF, you must first open a trading - Demat account with any broker.
It is suitable for investors with strong liquidity requirements and a short time horizon. As Gold ETFs may be sold on the exchange at any moment, they are ideal for investors who cannot commit to holding for an extended period of time owing to immediate financial demands.
The ETF management charges fees for the service provided, the returns on Gold ETFs are significantly lower than the real gold return.
Physical gold is the most direct way to gain exposure to gold. Bullion, Jewellery or Coins are terms used to describe gold in physical form. The value of physical gold is determined by its bulk and purity rather than its monetary face value.
These may be purchased from a jeweller. Owning actual gold incurs storage costs, since it may need the use of lockers. Physical gold is the best way to own gold since it is easily accessible in times of distress.
Physical gold is most suitable for long-term investors who wish to buy gold for use as jewellery for the marriage or to gift someone. Also, it is suitable for investors who wish to speculate on gold prices; in such circumstances, bullion is better since it does not incur a lot of manufacturing expenses.
However, Physical gold comes with its own drawback such as the danger of theft. As a result, it must be held in a bank locker, incurring additional storage charges.
Gold should be included in every long-term portfolio, regardless of the returns it generates. While there is no perfect allocation method, if we go back in time, there was an event every 10 years that may have wrecked the economy or country. As previously said, gold functions more as insurance than as an investment in the total portfolio.
If you haven't identified with any of the above three, it is recommended to allocate an equal amount of time to all three possibilities. Physical gold is important, but SGB generates tax-free profits through illiquidity, whereas ETF is liquid and may raise or decrease its gold holding. ETFs can also be utilised in regular SIPs and then redeemed for consumption.