Gold prices have rallied to an all-time high. By the start of September, the cost of 10 grams for 24K gold had crossed Rs 40,000, where it had been around Rs 31,000 in January. At the same time, the stock market, which normally outperforms gold over long periods, has turned volatile. The debt investment market, too, is volatile due to several high-profile defaults, while returns from fixed income instruments are also falling due to reductions in interest rates. There is the cloud of recession hanging over the global economy. And therefore, it is no surprise that investors have turned to precious metals like gold and silver, driving their prices up to record levels. What should you know about buying gold now?
WHAT IF YOU BUY NOW?
You may be drawn to the idea of investing in gold now. But it’s almost always a high-risk proposition to buy an asset whose valuation is at an all-time high. If your idea is to buy gold now to make a quick buck, it may backfire. You are relying on the assumption that someone may buy your gold at a higher price, and this may or may not happen. For example, investors who bought gold at record valuations around 2011 have had to wait till 2019 to make any meaningful gains. In the in-between period, this asset class returned less than a savings account. Gold, too, is a volatile asset which reacts sharply to global investor sentiment. As a gold investor, the more viable approach is to be a regular long-term buyer of small quantities during price corrections. This way, you will gradually accumulate this asset at lower costs and be able to reduce your risks.
HOW MUCH GOLD IS ENOUGH?
Your investment portfolio should be a diversified mix of assets. You could, for example, have real estate, mutual funds, shares, fixed deposits, PPF, jewellery and gold. In India, the traditional preference has been to have a portfolio heavy on real estate and gold. However, lately, we have seen a greater preference for financial investments — mutual funds, for example — which are pocket-friendly and easier to manage. That said, diversification is necessary, and gold does play its part. At a time such as this, gold would have shored up your portfolio even as your equity investments were falling, thus providing you stability in a difficult time. The thumb-rule is that five per cent of your portfolio can be gold. You can go higher if your risk appetite permits it. While gold will provide stability to your portfolio, this also means that it may go through long periods of no growth, which will drag down your overall wealth growth.
WHAT & WHEN TO BUY
If you are looking to buy physical gold, your options may be diverse as jewellery, coins, bars, and artefacts. If you are buying jewellery, you will also have to account for making charges, as well as GST — three per cent on the gold value, and five per cent on making charges — which may bring down the overall value for investment. Then there are charges for safe storage too. But, truth be told, traditional jewellery buyers are mostly not deterred by these additional charges. We are heading into Diwali season, and this is typically the time when gold prices peak. If you are buying for consumption or traditional reasons, this may be the right time to buy. However, purely from an investment point of view, buying at peak prices is a bad idea, and you may want to wait for the prices to correct.
If you are looking at gold as an investment, you should consider gold Exchange Traded Funds (ETF) and mutual funds, as well as Sovereign Gold Bonds (SGB). ETFs and mutual funds track the price of gold and can be bought from most fund houses. On such investments, there is an expense ratio you need to pay — typically ranging from 0.06 per cent to one per cent. With the SGB, you also get a guaranteed interest income along with tax-free capital gains upon scheme maturity. With gold in paper form, you do not have to worry about safe storage and purity. Lastly, you could also buy digital gold from MMTC-PAMP via online trading platforms and select payment apps. This investment, too, will attract three per cent GST. However, these are great options to avail if you are looking to slowly accumulate gold to diversify your portfolio.
Gold is on fire, no doubt, but don't rush in and risk your hard-earned money. Rather, have a long-term investment plan, create a diversified portfolio, and let gold play its part in it.
— The writer is the CEO of BankBazaar.com...