Indian households own more than 25,000 tonnes of gold, making India among the top 10 countries that own the world’s gold. As a traditionally passed down item from one generation to the next, gold is known to have a significant investment value in the country. Considered a safe illiquid investment, gold has delivered a 10% annualised CAGR return rate in the last 30 years. In the same period, its depreciation has been quite less, making it an attractive investment option. However, like any other investment option, the price of gold is subject to an upswing and a fall.
So, keeping all your investment options in mind, how does gold stack up? What are the things to factor in this investment decision? Or simpler yet,
How do I decide whether to invest in gold?
Any person looking to invest in gold should ask three questions before making a decision:
1. What kind of safety, liquidity, and returns does gold offer?
2. What is my existing investment profile, objectives, and goals? (Read more about this below)
3. Should I buy physical or digital gold? (Read more about the difference here.)
Gold is a low-risk and safe investment option. Its returns are mostly stable. It has a high liquidity factor. Clearly, an appealing investment vehicle that helps earn returns between long-term assets and short-term liabilities in one’s portfolio. Yet, while investors queue up to buy when the price of gold is on the upswing, even experts cannot predict the market bottom or peak of this item. The insight is available only in hindsight.
Investment assets are primarily classified as equities (stocks), fixed income (bonds), and cash equivalents. Asset/Investment classes are independent of each other. Gold should be treated as an investment asset of its own and should act as any other asset class. This means that an investment in gold will not affect or have any dependence on your other investment classes.
One can make a balanced investment portfolio by distributing the asset classes uniformly to ensure less volatility between all investments. Many eggs, many baskets. The risk of volatility in any one basket is mitigated by the relative stability of the other baskets. With this, the risk-adjusted returns will take volatility of any kind into account, but still deliver results that do not hurt your overall portfolio.
How much should I invest in gold?
For the most part, equity and debt asset classes drive the investment engine: equity drives long-term wealth creation and economic growth, while debt provides stable returns and wealth creation. An investment in gold would mean more diversity and less volatility in your investment profile as compared to only equity + debt. Despite this benefit, most experts agree that gold should not form a major part of your investment portfolio.
Financial experts suggest that in a balanced portfolio, gold should not exceed 15% (ideally, it should be 8-10%) of one’s overall investment vehicles, no matter what the investment portfolio or goal. This is because gold does not produce economic wealth, and nor does it have industrial application like other metals. It is subject to the same market risks such as uncertainty, tensions, geo-political risks, slowdowns, and depreciation of the currency, among others. In such times, global investors look to diversify from their staple assets, thus giving gold prices a nudge up.
4 interesting tips to consider before you buy gold
- Gold has been treated as a hedge against inflation by those wanting to protect their purchasing power. While gold has historically yielded good, stable returns in currency terms, it’s useful to evaluate the growth against the rate of inflation.
- Investors can look at gold exchange-traded funds or sovereign gold bonds or a combination of both to invest in gold which will support your portfolio even during times of crises.
- As economies get more stimulus from governments, gold prices tend to go up.
- Do not buy gold as an emergency corpus: physical gold, for example, does not offer the same return due to making and breakage charges as well as price volatility.
As you can see, gold can become a good investment option for those looking to diversify their portfolio. If you want to learn more about how to make a gold investment work for you, Appreciate can help you with investment, savings, and more to reach your financial goals.
