• 08
  Mar 2023

• GOLD as an Investment Option

  
  

  CA Seema Korgaonkar | PGDM

Traditionally, there was only one way in which people would invest in Gold, it is done by buying physical gold in the form of coins, bullions, utensils, artifacts, or jewellery or even by having gold attached in various forms like threads, buttons to the wearing apparels. However, there are modern forms of gold investments in recent times, such as gold ETF (exchange-traded funds) and gold mutual funds.

Gold ETFs are similar to buying an equivalent sum of physical gold but without the troubles of having to store and safe keep the physical gold. Hence, the investor can have all the advantages of having Gold as an Investment option and do away with all the disadvantages.

Reliability, marketability and earnings (returns on investment ) are the three major yardsticks most cautious investors look for before putting their hard earned money in the market. While gold meets the first two without any problem, it doesn’t perform abysmally at the third one either.

Here are a few reasons for you to invest in gold:

1. Putting your hard earned money in gold is a winner because it is an inflation-beating investment. If you take into consideration the inflation, over a while, Gold outperforms everything else.
2. Gold has a negative correlation with equity investments. For example, if the equity markets collapse, gold would take care of the downfall of the portfolio. Considering gold as an investment option in your investment portfolio will be a shock absorber to the overall volatility. Gold would always act as a cushion to your investment strategy.

How to Invest in Gold

By putting money in gold funds, one invests in stocks of companies engaged in bullion and bullion-related products. A gold mutual fund also includes silver, platinum, and other precious/semi-precious metals in its investment portfolio. A mutual fund manager on behalf of an asset management company manages the gold fund, unlike gold ETFs. They make use of the fundamental trading analysis to buy and sell stocks to maximize returns for stakeholders. Returns from gold funds depend on market conditions to a certain extent. Gold mutual funds reduce to a considerable extent the risk of return by allocating investments over an extensive variety of investment options. In other words, mutual funds work on the principle of diversification, i.e. not putting all eggs in one basket. Investors need to gauge their risk taking ability and objectives of investment, before selecting such a mutual fund.

In India, Gold has a profound magnitude. There is susceptibility due to various reasons. India has become increasingly obsessed with gold over some time and Indians now hold most of the Gold that is held worldwide. While the world continues to debate whether Gold is a sustainable investment or not, Indians have the unshakable faith in their beloved precious metal for generations. With the introduction of the Sovereign Gold Bond, it is now even easier & safer to invest in Gold. The icing on the cake is a small return on it & of course one cannot overlook the tax benefit if one holds it till maturity.

Gold Sovereign Bonds are the most reliable way to buy digital Gold as they are issued by the Reserve Bank of India on behalf of the Government of India with an assured interest of 2.50% per annum. The bonds are denominated in units of grams of gold with a basic unit of 1 gram. The maximum investment one can make is 4 kg. These bonds have a tenor of eight years with an exit option from the fifth year onwards. It’s again a hassle-free way of investing gold as you have the ownership of gold without any physical possession.

There are a plethora of precious metals, but gold is placed in high regard as an investment. Due to some influencing factors such as high liquidity and inflation-beating capacity, gold is one of the most preferred investments in India. Gold investment can be done in many forms like buying jewellery, coins, bars, gold exchange-traded funds, Gold funds, sovereign gold bond schemes, etc.

Though there are times when markets see a fall in the prices of gold usually it doesn’t last for long and always makes a strong upturn. Once you have made up your mind to invest in gold, you should decide the way of investing meticulously.

Coming to the most important part deals with – “How to invest money in gold.” Well, there are some conventional and modern types of gold investments preferred by people. In conventional forms, it was just buying physical gold in the forms of jewellery, coins, billions, or artifacts. The scenario has changed nowadays and investors have more options to invest such as gold ETF and Gold Funds.

Gold ETFs (Exchanged Traded Funds) are similar to buying physical gold but the only difference is you don’t buy the physical gold. You don’t have to go through the hassles of storing the physical gold, instead, the gold bought is stored in Demat (paper) format. On the other hand, gold funds deal with investing in gold mining companies.

or a conventional investor, the most important criterion is safety, liquidity and profitable returns. You can expect to meet all these criteria while investing in gold. However, some investors consider gold returns as extremely volatile but gold proves to be a haven in times of uncertainty for many investors. Let’s contemplate some points that prove gold investment can be a wise decision:

No matter what the rate of inflation is, returns on gold investment have always proved to be in line with it. In a nutshell, one can consider it an inflation-beating investment

Another major factor that calls for gold investment is liquidity; it provides excellent liquidity to investors.

The bottom line is - Each type of investment has advantages and disadvantages associated with it. If the investor is not in favour of holding physical gold, he can go for other alternatives such as ETFs, SGBs etc. Although gold is not a passive investment like stocks and bonds that provide you with a regular income in the form of interest and dividends, it can provide you excellent liquidity and also beat inflation. The advantages of investing in gold are much more than the disadvantages. In short, all those investors who don’t need the funds in the short term can opt for Sovereign gold bonds and for investors, who prioritize liquidity, can opt for gold ETFs and funds.