Gold as an Investment: Should you Buy, Hold, or Sell?
The concept of gold as an investment can be intriguing. When you see a man wearing a Gold face mask costing a whopping Rs.3.5 lakhs, you know you are in India.
The Indian obsession for the yellow metal is no secret. Buyers consider gold as not only prestigious and auspicious but also as a security investment.
Interestingly, the current challenging times have not diminished its sheen. Gold prices have surged by more than 25% since January 2020.
Why gold as an investment
Gold as an investment is attractive for two main reasons: one, to diversify your investment; and two, to get good returns during uncertain times.
Gold provides easy liquidity and helps in overcoming inflation. It is a general trend that prices of gold tend to rise when the stock markets (equity) go down.
Tips on including gold in your portfolio
When you look at gold as an investment, take care. Ideally, exposure to gold in your portfolio should not exceed more than 10%. If you already possess a lot of physical gold, you could consider selling a part of it to capitalize on the current surge and balance out your portfolio.
If you haven’t considered gold as an investment yet, but are considering so now, read on. There are a myriad ways to invest, depending on your risk appetite.
Much against popular belief, for investment purposes, purchase of physical gold is discouraged. Gold has high buying/selling costs, purity is a concern, and there is a risk of theft. Investing in paper gold is much safer and more liquid.
How to invest in gold
You can turn to gold as an investment in multiple ways. Consider these investment instruments in paper gold:
Sovereign Gold Bonds (SGBs): SGBs are one of the safest gold schemes started by Government of India. This was done to reduce the demand for physical gold and shift into financial savings. SGBs have dual benefits: capital appreciation and a fixed rate of interest. Their tenure is of 5-8 years and offers an additional interest rate of 2.5% p.a. in addition to the price of gold on redemption. On maturity, the capital gains, if any, are also tax free. Investors can buy SGBs through commercial banks, post offices, and stock exchanges. This is a good option only for the long term as exiting before maturity could attract capital gains tax. You can buy SGBs in denominations of one gram of gold and in multiples thereof. The next SGBs would be available in August and September, 2020.
Gold ETFs (Exchange-Traded Funds): ETFs are another way of opting for gold as an investment. If you need funds at short notice, then Gold ETFs may be your best bet. Simply put, gold ETFs are gold in electronic form. An ETF investment fund is traded on a stock exchange just like any other stock. Gold ETFs are low-risk investments that suit conservative investors. They are passive investment instruments that are based on gold prices and invest in gold bullion. All you need to do is open a demat account. One Gold ETF is equivalent to 1 gram of gold backed by physical gold of high purity (99.5%). Redeeming your funds by selling gold ETFs is a rather simple process. This is unlike selling of physical gold, which is a lot trickier and unreliable.
Gold Mutual Funds (MFs): Gold MFs are just like any other mutual fund where a fund manager manages the gold fund for a minimum fee. They comprise a diversified portfolio including silver, platinum, and other metals in their investment basket. So any changes in gold prices do not drastically affect these funds, making them less riskier. These are good for small investors with an option of investing through SIPs.
Before investing, carefully study the markets, keeping in mind your financial goals and the investment risks involved.
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