For Indian investors, the allure of gold as an investment option has continued through the ages. Its intrinsic value, historical significance and safe-haven status make gold an attractive asset class. Gold’s enduring value also makes it an excellent hedge against inflation. However, in an era of financial innovation, there is more than one way for investors to capitalize on gold’s potential as an asset class.
Let's take a look at planning gold investments and exploring avenues for enjoying the best returns.
Jewellery
Indians choose gold jewellery as an investment option in significant numbers. While physical gold does offer a store of value, it is a relatively expensive investment strategy. The making charges of gold jewellery, in fact, contribute to the final purchase price and sunk cost during re-sale of that item. Thus, gold jewellery is a more suitable purchase from an emotional and ornamental perspective and holds less long-term value as a smart investment approach.
Solid Gold
Solid gold, such as biscuits, bars, and coins, is another popular investment option. This form of physical gold is a better investment than jewellery since making charges are low and investors can enjoy high returns when selling. Do remember the risk of storage and theft issues before investing in solid gold.
Both solid gold and jewellery provide a sense of security, but come with practical challenges like storage, insurance, and liquidity concerns. For the best returns, investors should consider modern investment instruments.
Gold ETFs
Gold exchange-traded funds (ETF) offer a convenient and cost-effective way to invest in gold. These funds are traded on stock exchanges providing instant liquidity and negating the need for physical storage. Investors can purchase units in gold ETFs through a demat account. ETFs represent ownership of gold without actually having to own and store the metal. These are generally less expensive and more liquid than solid gold. This ease of trading and the ability to buy or sell at market prices make gold ETFs an attractive proposition for earning better returns.
Sovereign Gold Bonds
Sovereign Gold Bonds (SGBs) are another contemporary avenue for gold investment. Introduced by the Government of India in 2015, these bonds provide an opportunity to invest in gold without the hassle of physical ownership. SGBs offer a fixed interest rate (2.5% every year) and carry the advantage of capital appreciation based on the prevailing gold prices. At the end of the bond tenure (term of eight years), investors receive the maturity amount equivalent to the prevailing market value of gold. Typically, SGBs involve a lock-in period of 5 years. No management fees are levied for SGBs.
Gold Funds
Gold mutual funds either directly or indirectly invest in gold reserves – physical gold, stocks of gold producing companies, stocks of mining companies, etc. Here, again, investors can enjoy good returns without having to physically purchase gold. While gold funds invest in gold ETFs, the returns are directly dependent on the underlying physical asset.
Gold mutual funds are ideal for investors seeking diversification in their portfolio. Since these funds are regulated by the SEBI, investors are protected and face lower investment risk.
Maximizing Gold Returns
As an investment class, gold offers high earnings potential over the long term if investors follow some best practices.
Diversification
While gold has intrinsic value, it's crucial to remember that gold investments should be a part of a diversified investment portfolio (allocation can be between 5% to 10% in your overall portfolio). Combining gold investments with other asset classes like equities, fixed income, and real estate can help mitigate risks and enhance overall returns.
Periodic Investment
Timing the market is a challenging task for most novice investors. Rather than attempting to predict price movements, consider adopting a strategy of periodic investments. This can be achieved through systematic investment planning (SIP) in gold mutual funds or staggered investments in SGBs.
Long-Term Perspective
Gold is an asset that rewards patience. Its value appreciates over the long term, making it a suitable option for investors with a horizon of several years. Instead of expecting rapid gains, focus on the steady appreciation that gold typically delivers.
Conclusion
Planning investments in gold requires a strategic approach that goes beyond traditional avenues. Whether it's the convenience of gold mutual funds or the return potential of SGBs, the options available in the market cater to the unique needs of several investors. By embracing these innovative investment vehicles, individuals can embark on a journey to secure their financial future through gold investments while optimizing returns and managing risks effectively.
Connect with Tata Capital Wealth to get expert guidance on the right investment opportunities to grow your portfolio.
12 September 2023
4 mins read
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