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BASL Registration Number: 1951 | Non-Individual RIA. Regn No. INA000017620 | Validity Perpetual

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Busting the Myth Series: Myth no. 1 – Gold is the jewel among my investments

Updated: Mar 21




Myth no. 1 – Gold is the jewel among my investments

Hindus believe in the sade teen (3 & 1/2) muhurat basically 4 days when it is considered especially auspicious to buy gold. Then we have Diwali, marriages and a host of other festivals, which keep the jewelers busy.

So Kharidne walon ko kharidne ka bahana chahiye.

It may be either in the form of coins or rings or in the form of jewelry.

Does this buying really constitute investment? When we think of an investment portfolio we generally think in terms of buying at an opportune time and selling when the goal requirement arises or when there is adequate appreciation. Now try and apply this logic to your Gold purchase. Recently the Gold prices reached a high of 32000. Did you in all seriousness even think of selling your wife’s gold ornaments or the family Jewelry inherited from your parents at this time? Will you think of selling when your daughter is seeking admission into an overseas university for higher education, instead of taking a loan?

Most of the Gold purchase ends up being a dead investment and does not make any contribution towards fulfillment of any of your financial goals except possibly gifting it to your daughter in marriage. If that is the aim by all means accumulate physical Gold to fulfill this requirement and no more. And while you are at it do not go overboard. Her happy married life is not linked to the amount of Gold you give her.

Investment in Gold as part of an overall strategy is a different ball game altogether.

Returns history


Rupees

Rupees

Rupees

Year

Per 10 gms

Year

Per 10 gms

Year

Per 10 gms

1970-71

184.96

1985-86

2125.47

2000-01

4474

1971-72

200.16

1986-87

2323.49

2001-02

4579

1972-73

242.57

1987-88

3082.43

2002-03

5332

1973-74

369.33

1988-89

3175.22

2003-04

5179

1974-75

519.19

1989-90

3229.33

2004-05

6145

1975-76

545.21

1990-91

3451.52

2005-06

6901

1976-77

549.82

1991-92

4298

2006-07

9240

1977-78

637.93

1992-93

4104

2007-08

9996

1978-79

791.22

1993-94

4532

2008-09

12890

1979-80

1158.75

1994-95

4667

2009-10

16210

1980-81

1522.44

1995-96

4958

2010-11

21400

1981-82

1719.17

1996-97

5071

2011-12

28100

1982-83

1722.54

1997-98

4347

2012-13

29610

1983-84

1858.47

1998-99

4268

2013-14

29300

1984-85

1983.92

1999-00

4394

Consider the Gold price chart above.

The biggest jump in the prices in numerical terms happened in last 10 years from 2004 to 2014 and the appreciation per year was 19%. But nobody invests in Gold for 10 years, so lets look at the longer-term return.

The 10 years prior to that the prices hardly moved. A 20-year period from the 80s till 2004 shows a 5% return.

A 30 year period from the 80s to 2014 high, show a 9.6% return.

The obvious conclusion is that Gold is a good hedge against inflation. Do not have greater expectations from it.

Does that mean you should not invest in Gold? Not at all!

In fact, we believe Gold should be a part of every investment portfolio because:

  1. As mentioned earlier, on a long term basis it is a good hedge against inflation

  2. During financial turmoil, it outperforms all other investment assets and hence reduces the overall volatility of the portfolio.

Practically we can’t wait for the next crisis to turn up for our Gold investment to glitter, hence the need for diversification.

A healthy and balanced portfolio will have growth assets like equity and real estate, steady assets like fixed income and debt investments and Gold to add further balance. How much percentage of each asset class in the portfolio? That depends on each individual’s profile.

In its latest Gold Investor report, World Gold Council’s Marcus Grubb, Managing Director – Investment Strategy and Juan Carlos Artigas, Director – Investment Research state, Our research shows that a 5%-6% allocation to gold is optimal for investors with a well-balanced medium-risk portfolio (a 60/40 portfolio in equities, cash and bonds).

Different forms of investment in Gold

Gold Exchange Traded Funds (ETFs):

If you have a demat account, you can buy gold in paper form on the stock exchange.

One can purchase gold in multiples of 1 unit. 1 Unit = 1 gram of gold. (A few fund houses also trade in gram gold as one unit.) The price of unit of one gram gold follows the market price of 24 carat gold.

Features of Gold ETFs are listed below:

  1. Safety & Storage: Since there is no physical gold involved, it is a safer avenue for investment in gold. So there is no question of storage as well.

  2. Less expensive: No making charges or locker charges are applicable in case of ETFs.

  3. Affordability: Gold can be bought in as small quantity as 1 gram.

  4. Purity: ETFs guarantee purity of gold, usually 99.5%.

  5. On redemption: One can get the money on redemption of Gold ETFs & not the physical gold. (Except one fund house Motilal Oswal)

  6. Wealth Tax: Gold ETFs do not attract any wealth tax liability.

Gold Mutual Funds:

Investing in gold mutual funds is like investing in any other actively managed mutual fund. It is useful for investors who do not have a Demat account.

The features are as follows:

  1. Ease of Operation: No Demat a/c is required.

  2. Safety & Security: Since no physical gold is involved it is safer to invest in gold mutual funds.

  3. Less expensive: No making charges or locker charges are applicable.

  4. Redemption Process: On redemption, the amount of funds will be dependent on the closing NAV of the fund.

  5. Wealth Tax: Gold Mutual Funds do not attract any wealth tax liability.

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