Investment

Does it still make sense to invest in gold?

ETMutualFunds.com asks mutual fund advisors and financial planners every week for a list of frequently asked queries by their clients. Often, these questions would be very topical, something that may be worrying many regular investors. The idea is to present the questions and the response of these advisors/planners to those questions for the benefit of our readers. This week we spoke to Gaurav Monga, a financial planner based in Delhi, to find out what are the common queries his clients. Read on.

Financial planner: Gaurav Monga, Director, PxG Consultants, a financial planning firm, based in Delhi.

Questions asked by his clients:
1. Should we invest in gold?
2. Should we buy more gold jewellery for exposure in gold?
3. Is physical gold better than gold bonds?
4. What are the pros and cons of Gold ETFs?
5. Will gold prices keep going up?
6. Is gold a good tactical call?

His response to his clients:
Gold has been soaring to new highs in the last 12-15 months. Thanks to the uncertainties all around the globe – the Covid-19 pandemic, US-China relationship, question mark on the economic revival, and so on – the rally has become more intense.

Since gold has delivered very high returns than other asset classes, it has been gaining a lot of traction among investors. Gold as an asset class does find its way into portfolios due to factors such as high liquidity and providing hedge against inflation if held for long periods. There should definitely be some allocation done towards gold by retail investors. In our country, gold has a high consumption, primarily because it is the most common form of gifting.

As part of pure investments, allocation towards gold can be around 5-10% of the portfolio. But investing primarily on the backdrop of good returns generated in the recent past should not be the only reason for investing into gold. This is because there have been instances in the past where the rallies in the prices of gold were followed by periods of consolidation in the prices. So, prices of gold will not move in a linear manner. Therefore, if exposure towards gold is built regularly over a period of time, one will certainly participate in the entire cycle of growth and consolidation of the asset class. Investing during periods of low returns is very important to make overall good returns from that asset class.

Therefore, in the current scenario as well, if one doesn’t have adequate exposure towards Gold, one can start allocating. But that process should be continued in the future as well when prices may become stagnant to be able to participate in the next rally.

As far as tactical call is concerned, the prices of yellow metal may continue to head up due to uncertainties created by the Covid pandemic globally. However, many retail investors might not understand when to enter and exit. Here are some of the avenues available to invest into gold for a long term to hedge your portfolio:

1) Physical Gold (not Jewellery)– It is the traditional form of investing in gold. The challenges faced in this mode are – purity of gold bought and storage. You might end up paying a lot of locker charges over a long term. Threat to safety is also there.

2) Gold Exchange Traded Funds– Its an alternative to physical gold, but it is held in financial form. So one need not worry about quality or storage. However, to sell these ETFs, you need a demat account and these are sold on the exchanges.

3) Gold Mutual Funds– Difference between ETF and fund is the mode of holding. The former is held directly through demat on an exchange and latter is through a mutual fund which would further invest into an ETF. The transaction is smoother. If you need your money, you just have to put in the redemption request with the AMC.

4) Sovereign Gold Bonds– These issues are launched by the government of India and are an attractive way to take exposure towards gold in financial form. These bonds also enjoy an assured interest rate over and above the movement in gold prices. But they do come with a certain lock-in as compared to other forms. So, the liquidity is not as high as mutual funds.

So, if liquidity is an important factor then ETFs and gold funds are a good option to invest in gold. Otherwise, Sovereign Gold Bonds, which also pay a fixed interest, are an attractive way to build exposure towards gold.

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