Want to add some gold to your nest egg? Answer these questions first
As your grandmother probably never gets tired of philosophizing, the gold doesn’t go to waste. Even the smallest hook on the thinnest chain would get you some returns, she must have told you.
She was both right and wrong. Just because gold is never ‘thrown in’ even the smallest chunk will earn you a few rupees – it’s a safe investment. False because investing is not just about getting returns; it is about obtaining optimal returns. For every rupee you invest, you should try to earn as high a return as possible, within a risk threshold that suits your needs and circumstances.
Right now, gold prices are trading flat. Should we buy some? Answering a few relevant questions can give you direction.
Is that jewelry you want?
If you like to wear gold jewelry, you can buy it right away, whether it’s trinkets with filigree work or bulky pieces with traditional designs. Wearing gold offers a unique joy for some. If you are one of those, no harm in indulging yourself because what you buy will certainly not go to waste.
Gold never loses its luster. You can keep your favorite pieces all your life and pass them on to your loved ones whenever you want. But, if you plan to “convert” your existing jewelry into new pieces at some point, make sure you invest in quality items now. Punching is now mandatory in India, so there is no way the jeweler can fool you about the quality of the gold. Still, you might want to check out the karats, percentage loss, and more, as well as how much you’re paying for crafting. The higher the non-gold expense of your purchase, the lower the returns.
Therefore, when buying gold jewelry with a lot of precious or semi-precious stones, keep in mind that you may lose a good deal of what you have invested when you try to sell or trade the coin after a few years.
Fancy some cookies?
Biscuits or gold coins are a favorite Indian purchase – they offer the satisfaction of buying the yellow metal without the expense of craftsmanship. These can be made into jewelry at a later date. Some jewelry retailers also offer cash, but this is something you should check before you buy.
Coins or cookies are easy to store and liquidate, but remember that they are also charged for waste and even for crafts. As an investment instrument, they are best suited for those who plan to convert them into jewelry after a few years, for example for the wedding of a child.
Until 10 years ago, “chit” programs were a popular way to invest in gold. Many came up with contests that offered “free payouts” to the winners. These were later removed, as “contests” were considered legally equivalent to lottery schemes. Following the collapse of a few well-known jewelry houses, the token schemes have lost their luster. These are now considered very risky, with mediocre returns at best.
How about reusing the golden MF corpus?
Gold mutual funds (MFs) are basically instruments that invest your money in units of gold. It is a popular way to diversify MF investments and offers easy liquidity (these can be liquidated in the short term and without any problems). In addition, there is no security issue, as there is no physical gold involved in the transaction.
Like any other mutual fund, gold mutual funds are regulated by SEBI, which offers a high degree of security. But these funds tend to be very volatile, increasing and decreasing with the price of gold in world markets.
Therefore, these are ideally suited for a longer investment horizon, say 8-10 years, said a Bengaluru-based investment expert. “For a 35-year-old professional, I would recommend putting around 10% of their total MF investment in gold MFs, which is a safe haven, for around 10 years,” he added.
Will Gold ETFs Work For You?
An exchange-traded fund (ETF), according to Investopedia, is a “basket of securities that trade on an exchange, just like a stock”. “ETFs offer low expense ratios and lower brokerage commissions than buying stocks individually,” he adds.
There are ETFs that invest exclusively in commodities, gold being one. If you have a Demat account, you can buy gold ETFs through brokers, online and offline. Their stock prices fluctuate throughout the day as ETFs are bought and sold. On the other hand, MFs only trade once a day, after the market has closed.
This means that if you are investing in gold ETFs, you should be prepared to trade intraday to get the most out of it; otherwise, your Investment Advisor should be prepared to do it for you. You can, of course, be a passive investor in gold ETFs and reap long-term dividends, but the returns are maximized if you keep a closer eye on price movements.
Unlike MFs, ETFs do not have SIP (Systematic Investment Plan) options, so you can only invest a lump sum.
Isn’t there more ’21st options of the century?
Yes there is. Among the options is digital gold, where the metal is sold digitally on platforms such as Google Pay, PhonePe and Paytm.
The investment can be as low as ₹ 1. The money you put in is used to get gold pro rata, and stored in depots or lockers managed by selected companies. It is said that digital gold is easily traded. But note that the regulatory mechanism in India may not fully cover this instrument. Make sure you understand the risks.
Another option is Sovereign Gold Securities (SGB), which are basically debt instruments governed by the Reserve Bank of India (RBI), which makes them very safe. You can collect gold gram-denominated securities issued by the RBI on behalf of the Indian government. There is a guaranteed interest of 2.5% per annum, and the bonds can be redeemed in cash at maturity. SGBs have an eight-year term and a five-year blocking period.
Can you ignore gold completely?
You sure can, but you might be missing out on a great way to diversify and balance your portfolio. Typically, gold rises when other instruments such as stocks and currency markets fall, and vice versa. It is therefore a good way to temper your risk.
Wear it, store it in the locker or file it numerically, gold retains its luster as a strong asset class.