Traditionally gold has been a store of value and now after the Covid 19 pandemic, with last year's gains of over 20 percent in price, it's safe haven appeal also came to the fore. And now after a substantial crash in value from the last year's high price, gold has again been gaining ground amid Covid 19 second wave and also on inflationary concerns, where the yellow metal works as a hedge against inflation.
Investment in Gold
As experts are suggesting to enter gold at the current price levels given the huge price appreciation the metal still offers, here we delve deeper on what gold investment form shall suit you as an investor. Typically in its second most use of gold worldwide that accounts for 20 percent of the world's physical gold are investments.
Why should one invest in gold?
Now before going into further details, we in brief lists out the many reasons because of which one should consider investment into gold:
1. Portfolio diversification
2. Gold serves as an inflationary hedge
3. Gold also helps to lessen the impact of highly volatility and lends stability to an individuals' financial portfolio. Typically there is shared an inverse relationship between gold and equity.
4. Historically gold also provides good return over the long term. Over the last 40 years, gold is said to provide annual return of over 9 percent and there were only few instance of annual negative returns.
Risks of Investing in Gold
Investing in physical gold has its own limitation such as the risk of loss due to burglary, storage issues etc. Also, in a case one wishes to go for the jewellery form of investment that is still costlier and also can go redundant with time. Then the issues concerning the purity of the investment also cannot be ignored.
Now after one has purchased gold in physical form be it coin or bar, one may face illiquidity risk as it can be difficult to see the gold product owing to lack of purity and origination certificates.
Here remember if you buy minimum 1 gm of gold, you need to shell out at least that much value together with GST.
Various platforms are offering digital gold which can allow investment into just 1 gram of gold. And as the market is primarily dominated by few players then is an overall risk. Furthermore, in the current schema of things, investment into digital gold is not overseen by a regulatory entity such as RBI or SEBI.
Gold Mutual funds:
Various asset management companies or fund houses offer gold mutual funds which primarily invest in Gold ETFs. Investment into gold mutual funds is risky and for these the NAV i.e. backed by real time gold prices which are influenced by current market scenarios. So, at some point in time, these gold mutual funds may or may not give favourable returns, say experts.
These are managed by fund houses and hence carry a higher charge and prove to be expensive in comparison to physical gold. Plus similar to gold mutual funds, there are attached market risks with the instrument. Gold ETFs can further be redeemed in cash and not gold as they are gold contract and derivatives
Sovereign gold bond (SGBs):
They are issued by RBI on behalf of the government and offer interest income in addition to capital appreciation upon maturity time of 8 years. Now, here despite the sovereign guarantee, one may face capital loss as the bond value is linked to price of gold in the international markets. Also, the instrument carries sovereign default risk as the instrument is not backed by physical gold and is instead a derivative of fold issued by the centre via RBI>
A sovereign default in this case refers to a situation where the Government of India is no longer able to make scheduled repayments on its outstanding debt.
Cost wise gold investment you can go for
Now depending on the cost involved, we may find the affordable gold investment suitable for you:
|Gold form||Minimum investment|
|Digital gold||Rs. 1|
|Physical gold||Cost of at least 1 gm of gold|
|Gold ETF||Cost of at least 1 gm of gold|
|Gold mutual funds||Rs. 100|
|SGBs||Cost of at least 1 gm of gold|
Physical gold investment be ideally and typically be purchased for use as in case of a marriage etc. In other cases it should be strictly avoided as there are risks of purity etc together with huge buy-sell spreads.
For investment purpose in case the time horizon is 5 years or more and there are no liquidity concerns, investments into Sovereign gold bond should be chosen. Here the interest option is lucrative and during the course of the investment, you will also have the option of making tax-free redemptions after staying put for at least 5 years. Also, the redemption of these bonds post maturity of 8 years is also tax free.
And now again for a shorter term horizon of not over 3 years, you can choose to invest in gold mutual funds or gold ETFs which have high liquidity.