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Investments are subjective. So are successful investment strategies. But ask any expert, and they'll collectively agree on one strategy - diversification.
If you're investing for the long term, then diversifying your portfolio is crucial to protect yourself against potential portfolio instability. And one excellent asset that can act as an inflation hedge and hold your portfolio together is gold. Gold as an investment has been a top choice for investors to hedge against potential financial risks. These financial risks include falling equity markets and rising inflation. It has been used as currency and a store of value for centuries and has an impressive, highly profitable track record. In this blog, we'll break down everything you must know about using gold investments as a hedge and how you can do this.
Gold has been a safe asset for centuries. It has historically retained its value during economic downturns and high inflation. Plus, gold investments have a low correlation with other asset classes, like stocks and bonds, which means they provide diversification benefits and reduce overall portfolio risk.
Moreover, inflation is a major concern for investors as it diminishes the value of their assets over time. Investing in the yellow metal acts as a hedge against it. This is because it is a finite resource with a limited supply. As a result, it holds its value even during periods of inflation, guarding your portfolio against market volatility.
You have several options if you wish to hedge your portfolio with gold investments. Here are the five most popular ones-
You can invest in physical gold through bullion coins, bars, or rounds. They come in different sizes, which can easily be accommodated in your budget. However, different sizes have different pros and cons.
For example, bigger bars are easy to store and manage but can be difficult to sell. On the other hand, managing multiple small gold items can be tedious, but, at the same time, they're easier to sell. Therefore, before investing in physical gold, you must consider these parameters and your investment goals.
Investing in gold exchange-traded funds (ETFs) is an effective way to use gold as a hedge against market volatility and inflation. They track the price of gold and trade on a stock exchange like a stock. Here are a few reasons to invest in gold ETFs as a hedge-
-They are easy to buy and sell through a brokerage account, and you don't have to worry about storing them.
-They are generally less expensive and more liquid than physical gold.
But remember, gold ETFs also come with risks, such as market volatility and tracking errors. So consider your investment goals and risk tolerance before investing in them.
Gold funds are a variant of mutual funds that directly or indirectly invest in gold reserves. The investment is made on stocks of mining companies, gold distributing and producing syndicates, and physical gold.
Moreover, these are open-ended investments that invest in units of a Gold Exchange Traded Fund (ETF).
SGBs are government securities that are issued by the Reserve Bank of India (RBI). Essentially, they are the substitutes for physical gold and are thus, denominated in grams. Investors can buy these bonds from the RBI on a per unit basis, wherein every gram of gold issued as per the bond has 999% purity and investors can buy and hold the bond for a term of eight years and earn interest at a rate of 2.5% every year on them.
Furthermore, with SGBs, the quantity of gold you purchase remains protected because you get the current market price at the time of redemption. If you invest in SGBs, you must pay and redeem the price in cash. What’s more, these bonds can be converted into Demat form and traded on the stock exchange, which is pretty convenient.
Investing in gold futures is another way to hedge against market volatility and inflation. Gold futures is simply a contract that allows you to buy or sell a certain amount of gold for a pre-determined price in the future. It allows you to hold a large amount of gold with a relatively small initial investment.
Gold futures are an excellent way to hedge your portfolio, as you can lock in a price to buy or sell gold in the future. Additionally, they are also highly liquid and can potentially earn profits from price movements in the gold market.
Gold can be a valuable asset in your portfolio, hedging against inflation and economic uncertainties. But you don't necessarily have to own it to invest in it. You can invest in gold ETFs and futures to enjoy the same security as physical gold.
Ready to invest in the precious yellow metal? Get started with Tata Capital Wealth today.
Policies, Codes & Other Documents