Gold prices have come down by almost 20 percent in the past two years after being at an all-time high. The question on everyone's minds is that if the fall continues, is it the right time to invest in gold? To answer the question, let us first understand the strategy people should follow before thinking of investing in the yellow metal.
Role of gold in your portfolio Do you know the role that gold plays in your portfolio? Before one starts to think of investing in gold, it is important to define this.
Unlike equity, real estate or other financial products, gold cannot be considered as the main asset class required to create wealth. It is an idle asset and its price depends on the demand and supply. It is considered a safe haven because it helps diversify and provides a hedge to the portfolio against market volatility.
How much money should be allocated to gold?
Ideally, it should not be more than 10 percent of one's overall portfolio. In fact, investing in gold should not be different than investing in any other financial instrument. So, whether it is going to be 10 percent or more should depend on the risk profile and financial goals of the individual.
Should one invest in gold now?
Well, yes, if the overall allocation is less than 10 percent of the overall portfolio. But it is advisable to invest in tranches instead of investing in one go because it can be risky in terms of timing the market, which anyway, is a futile exercise. So either don’t be over-cautious by not investing at all because of a fear of further fall in its prices or don’t be overconfident in terms of investing in one go.
Which form of gold is the best for buying?
Buyers should avoid buying gold in its physical form, unless the intention is to make jewelry, because of safety reasons and also the charges they will need to pay while reselling it. One of the best ways to invest in gold is either through ETFs i.e. exchange-traded funds, mutual funds or sovereign gold bonds.
In fact, buyers can get gold in a combination of Sovereign Gold Bonds (SGBs) and ETFs. While SGBs offer an additional 2.5 percent interest, ETFs provide better liquidity. The big advantage of investing in SGBs is also the fact that there is no taxation on capital gains on maturity.
To wrap up, some quick tips before you invest in gold:
1) Do not invest more than 10 percent in gold as a part of your overall portfolio
2) Do not invest in it because of its recent performance or based on traditions
3) If you plan to invest in gold for the long term i.e. more than 8-10 years, then SGBs is the better option
4) From a liquidity point of view, investing in gold ETFs is better
5) What can work better is a combination of gold bonds and ETFs to create your one's portfolio systemically. This mix can offer you both liquidity and higher returns.
6) You can even invest in gold in a monthly sip mode via mutual funds.
The writer is a chartered accountant and founder and chief gardener of Money Plant Consultancy
The thoughts and opinions shared here are of the author.
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