Gold as an Investment

gold as an investment

We have seen several characteristics of Gold ETF and Gold MFs in Gold ETF vs Gold Mutual Funds. Now the most important question is whether you want to invest in

1. Gold

2. Gold sector

3. Both Gold and Gold sector

  • If you opted for choice 1, then Gold ETF is the best choice.
  • If you opted for choice 2 then Gold mutual fund (MF) would be suited to your investment philosophy.
  • However, if you opted for choice 3 you can invest in either of them or both.

If this all sounds confusing then you should first sit and work out a structured financial plan with the help of a financial planner or advisor. The advisor should be someone who is keen on providing you a solution that works for you and meets your requirements and goals.

Why Investing in Gold directly is better?

Most financial experts advise investors to allocate up to 10% of their total investments to Gold. In my personal view one can allocate between 10-40% of their portfolio to Gold depending on an individual’s risk appetite.

In today’s time investing in Gold is as easy and accessible as Equities, which was not the case in the past. In the past the only way you could buy gold was to either buy jewelry, coins or bonds.

Today, you have the option to invest in electronic or paper gold (just like paper stocks). Gold is moving in tandem with inflation rate, which is always on the higher side in India barring a few periods of dips. This makes Gold an excellent option to insulate your portfolio from inflation pressures.

Returns from equities also help beat inflation but today we need an alternate asset class that is not closely linked to the financial markets. Gold is one such candidate which is not always directly co-related with financial markets.

During times of crisis and economic uncertainty people start buying gold, large institutions start investing in gold and central banks also take exposure to the yellow metal. This is one of the reasons why financial analysts call Gold as the “safe haven” and when people rush to buy Gold it is attributed as a “flight to safety”. Fundamentally speaking Gold supply is limited while demand is increasing, but I’m not a typical Gold Bug making a fairy tale about how the world is going to run out of gold.

Though Gold will still remain, the prices will move in tandem with inflation protecting your portfolio from value erosion over time.

Why take undue risks?

To put it in plain simple language, when you can simply invest in the commodity which is definitely valuable and has good physical and investment demand, why should you rely on companies and firms that are in to exploration, mining, etc? Unless you have a rationale to answer this question you are taking undue risks.

Although there is a professional team managing your funds it is very difficult to bet whether a mine will have reserves or not. Even if there were some reserves how will you determine if the mining company can produce enough output to sell tons and tons of gold to cover all the operating costs?

What about labor costs, labor issues, regulations, operational efficiency, management track record, currency risks, etc? Yes of course you may get answers to these questions if you read the scheme offer document or other material. But remember that there are only two funds in India – DSP Black Rock World Gold Fund and AIG World Gold Fund.

These funds have been launched in August 2007 and May 2008 respectively. These products are highly sophisticated and are suitable only for matured and sophisticated investors.

Return Comparison

Returns (in %) 3 months 6 months 1 year 2 years 3 years
DSP World Gold Fund -3.1 -9.4 9.2 13.8 6.1
AIG World Gold Fund -0.3 -4.8 16.0 23.4 13.9
Gold Bees 7.7 9 19 22.8 21.6

Source: The numbers above clearly indicate how Gold Bees (ETF) has delivered consistent returns. However, statistics can change from time to time favoring one side or the other, but if you want to achieve true asset allocation investing in Gold ETF is recommended.

This will help you take exposure to Gold rather than mixing Gold and Equity. Experts who recommend an allocation of up to 10% of your portfolio to Gold, will definitely recommend Gold ETFs, which have a simple structure.

Lesson on Asset Allocation

Many people have their flawed assumption that investing in various sectors will complete their asset allocation, which is only half-truth. The beauty of asset allocation is maintaining a balance across asset classes such as equity, debt, gold, real estate, cash, etc.

Asset Allocation can be compared to the three doshas in Auyrveda or the file elements of nature (air, fire, water earth and space). So trying to argue that equity is better than gold or debt is better than equity, etc is irrational. One needs to make informed choices based on one’s life goals and within the given market conditions.

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About the Author

Sridhar is a financial analyst and his work experience spans areas of financial analysis, modeling, valuation and research on companies, specific sectors, etc. Sridhar is an MBA graduate with Finance major from Maharishi Institute of Management.

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