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

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Do you want to buy or invest in Gold? Know the difference!

Updated: Mar 21

Indians are the most obsessed people in the world with gold. Be it at weddings, festivals, thread ceremony, donating to temples, gold is a status symbol for Indians. They not just spend a lot on gold but also gift gold to close relatives on special occasions as per customs.

Besides physical jewellery, people have a lot of options to put money in the yellow metal through gold exchange traded funds, gold mutual funds, sovereign gold bond scheme, etc. Somehow, the common perception among most people is that one should invest in gold to accumulate gold for marriage.

But buying gold is different from investing in gold. Gold as a commodity broadly serves two purposes, one is for consumption, i.e., buying jewellery for marriage and the other is for diversification of investment portfolio. Let us examine them.

  1. Marriage goal: You will need to first have a fair idea about the amount of gold required for the wedding depending upon its importance in your community events. There are 2 ways you can plan to accumulate gold for marriage. One option is to buy gold on periodic dips. A word of caution here. Do not be bound by tradition and buy gold on Dhanteras or Akshaya Tritiya when gold prices typically rise. Instead of looking for a “shubh muhurat” to buy gold, buy smartly in the slump season when gold prices are in the red. Further, if your goal is at least 5-7 years away, then buying gold bars or coins would be a better option than buying jewellery. Gold jewellery may become dull over the longer time frame and the look & design could become outdated. In that case, you will have to incur the redesigning and refurbishing costs. The second option is to create a corpus to buy gold jewellery in the future for marriage. This would make sense only if the marriage goal is long term, at least 8-10 years away. For the creation of corpus for marriage, however, avoid putting money in gold ETFs, gold funds, sovereign bond scheme, etc. Equity is comparatively a more tax efficient option which would offer better returns and also likely to beat inflation. Even a 10 per cent compounded return on equity is good enough to accumulate all the gold you want for the future. You can use both options to accumulate gold depending upon your time horizon and requirement. Avoid gold schemes of jewellers. You run the risk of fluctuation in gold prices at the time of actual purchase plus the high making charges.

  2. Portfolio Diversification: As advocated in many of our earlier blog articles, diversification is very important in an investment portfolio to reduce volatility. It helps to manage downside risks as various asset classes behave in a different manner in different economic situations. Gold can be a part of your diversified portfolio to hedge your investments against any economic turmoil. You can take exposure to gold through ETFs, mutual funds, sovereign gold bond scheme, etc., to diversify your portfolio. If you have a demat account, you can buy gold in electronic form as ETFs on the stock exchange. Gold ETFs are easily tradable on exchanges and can be bought in as small quantity as equivalent to 1 gram. You can also invest in gold mutual funds just as you invest in equity or debt mutual fund. No demat account is required in this case. Both Gold ETFs and mutual funds are liquid and can be redeemed anytime just like any share or mutual fund. Sovereign gold bond scheme offered by the government is another option. It offers fixed interest for a fixed tenure and capital gains, if any.

Conclusion: Accumulating gold and investing in it are two different things. The rationale behind putting money in gold needs to be clearly defined. If you want to buy gold for marriage, buy on periodic dips. Depending upon the time horizon of the goal, you can also create a corpus for buying gold for the future through investment in equity mutual funds. The corpus can be utilised to buy gold jewellery at the time of wedding. If you wish to diversify your investment portfolio, then you can take exposure to gold through ETFs, mutual funds, sovereign gold scheme, etc. While gold can be a good hedge in any economic downturn, it should not exceed 10 per cent of your total portfolio value.

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