Don't invest in gold, unless you know this.

Gold investments are always considered a safe haven by many. Many people invest in gold to earn great returns. But, did you know that, gold in comparison to nifty (Indian index) , had outperformed only 3 times on a yearly basis since 2006 i.e. on 2008, 2010 and 2011.

By looking at this, gold doesn’t seems to be a good investment. So, should you invest in gold or not?. Are these people right?

Before answering whether to invest in gold or not, the question is why people invest in gold?

There are reasons for that, which includes

• Liquidity – One of the most important feature of gold investment is liquidity. Gold can be bought and sold in a very short time. That is why many people fall for it.

• Inflation Hedge : - Inflation leads to depreciation of currency. But gold on other hand beats inflation. Therefore investing in gold is a hedge against inflation

• Diversification of investment portfolio : - It is helpful in diversifying and hedging your investment portfolio against market volatility.

• Hyperinflation : - Many people think that due to hyperinflation, their local currency turns out worthless or all currencies become worthless then the medium of exchange will be the gold. But this may not be true, as nobody claims that. And if that happens why not silver? .

• Value of gold : - Value of gold remains same all over the world. So, if you have gold of Rs 10,000, then its worth will remain same in other counties too.(if varies then due to taxes and duties)

• Negative correlation with stock market :- Gold has Negative correlation with stock market. Meaning if market falls, rate of gold will rise and if market rises, gold price will fall.

Now, lets see what are the different investment vehicles for gold. And their advantages and disadvantages–

1) Physical Gold (Bullions, Coins, jewelry etc.):- Many people still invest in physical gold for returns. But investing in physical gold have many disadvantages over it's advantages.

• Making Charges is one of the major down side in investing in physical gold.

Also, if your jewelry gets out of fashion then, again you will have to pay this charge. (#Myopinion – never buy jewelry for investment purpose).

• Purity :- There are many cases, when someone bought gold, lets say, 24 karat and when they sold that gold, they gets to know that it was only 18 karat gold . Meaning, there is a fraud by gold seller.

• Safety:- If your gold is in your house then there is a risk of theft . So, to reduce that risk you have pay an extra cost for locker.

• Liquidity : - Gold is known for its liquidity, but heavy gold bars are illiquid. If you own one large gold bar worth Rs100,000 as your entire holding in gold, and then decide to sell 10%, you can't exactly saw off the end of the bar and sell it.

2) Digital Gold (Gold Etf and Gold Mutual Funds):- One alternative to a direct purchase of physical gold is to invest in one of the gold-based exchange-traded funds (ETFs) and mutual funds. These funds may be purchased or sold just like stocks

Some advantages are

• Safety as gold in D-mat account

• Start with minimum amount

• Low cost

• Can Diversify

• Purity (as not actually owning the gold)

But there are some disadvantages too,

• The price at which you bought these funds are not related to the actual price of gold. So, there may be a possibility that gold rates are higher than that of etf and mutual fund or vice-versa.

3) Sovereign Gold Bond (SGB) :-SGBs are the Bond issued by Reserve Bank on behalf of Government of India. They are substitutes for holding physical gold.

Some of its advantages are

• Safety as gold in D-mat account

• Purity (By Government)

• Simple Interest of 2.5% per annum on initial amount invested. But taxable according to tax slab.

• No capital gains tax.

• Can buy and sell in stock market too.

But it also has some disadvantages too.

• Have to buy atleast 1gm at price depends on gold market.

• Lockin period is minimum 5 years.

So, should you invest in gold or not?

Answer to this question depends on your financial goal, age, risk etc. But in my opinion if you are old or above the age of 35, then you should invest in gold to diversify the portfolio and to reduce risk. And that too through SGB, as it has more advantages over other forms of investment.

And if you are young, don't invest in gold, as investment in gold is only to reduce risk. But at younger age, you are capable of taking risk. So, Why not to use that money to fetch higher returns in stock market in long term?

Amount to invest in gold

It should be 5 to 10 % of your portfolio and maximum of 20%, if in older age.

When to buy gold as investment

Like any other asset class, buy when it's prices are low and sell when prices are high.

Since, gold is negatively correlated to stock market, so when market is expensive, gold is cheap. Therefore can buy when market is expensive.

Conclusion

Gold investment is not always good but can be beneficial to the person according to their financial goals, age risk factor etc.

You should invest in gold if you are older, to diversify risk and to hedge from inflation.

But if you are young, then you should not invest in gold. Rather use that money to fetch higher returns on other asset class like stock market.