With all the innovation that has been happening around us in our lives, there has been innovation in financial products as well. We now have all sorts of complex financial instruments to invest our money into. However, there has been an asset class which has always shined since its inception and must find a place in an investor’s portfolio.
Gold has been valued for its rarity and durability for thousands of years, and it has also been a store of wealth and a form of currency throughout human history. Today, gold remains a popular investment option, sought after by investors for its diversification benefits and inflation hedging.
In this article, we will explore the reasons why gold is an attractive investment option, the different ways to invest in gold, and the potential risks and benefits of investing in this precious metal.
One of the primary reasons why investors choose to invest in gold is its ability to provide a hedge against inflation. Unlike paper currency, gold has intrinsic value and is not subject to the same risks of inflation. As the cost-of-living increases, the price of gold tends to rise, which can help investors maintain their purchasing power over time.
Additionally, gold is a low-correlated asset, which means that it tends to perform differently than other assets, such as stocks and bonds. As a result, adding gold to a diversified investment portfolio can help reduce overall risk and increase stability.
There are several reasons why one may consider investing in gold:
Diversification: Gold as an asset class has low correlation to other assets, meaning it tends to perform well during times of market turmoil or economic uncertainty, while other assets may decline in value. Including gold in a diversified investment portfolio can help reduce overall portfolio risk.
Inflation hedge: Gold has historically been a good hedge against inflation, as its price tends to rise along with the cost of living. Investing in gold can help preserve purchasing power and maintain the real value of one's investments.
Store of value: Gold has been a store of value for centuries and is recognized and accepted globally as a form of currency. Investing in gold can provide a long-term hedge against currency devaluation and economic instability.
Let us discuss about several ways to invest in gold in India:
Physical Gold: The most traditional way of investing in gold is by buying physical gold such as gold coins, bars, and jewellery. Gold jewellery is very popular in India, but it is not a very efficient way to invest in gold as it comes with making charges, and the resale value is lower than the purchase price.
Gold coins and bars are a more practical way to invest in physical gold, but they also come with the added cost of storage and insurance. One has to ensure the physical gold is stored in a safe place to avoid theft. Bank lockers can add to the cost and reduce returns.
Gold Exchange-Traded Funds (ETFs): Gold ETFs are mutual fund units that invest in physical gold. They trade on stock exchanges just like shares, and their prices are directly linked to the price of physical gold. Investing in gold ETFs is a convenient and cost-effective way to invest in gold without worrying about storage and security.
Gold Mutual Funds: These mutual funds that directly or indirectly invest in gold reserves. Investments are usually made on stocks of gold producing and distributing companies, physical gold, and on stocks of mining companies. It is a convenient way to invest in an asset without having to purchase the commodity in its physical form.
Sovereign Gold Bonds (SGBs): SGBs are a type of government security that allows investors to invest in gold without physically owning the metal. SGBs were introduced by the Government of India in 2015 to reduce the demand for physical gold and to mobilise the idle gold held by households and institutions in the country.
SGBs are denominated in grams of gold and are issued by the Reserve Bank of India (RBI) on behalf of the government. The bonds have a tenure of 8 years, with an exit option available after the fifth year. SGBs offer several advantages over physical gold, including no storage costs, no risk of theft or loss, and an annual interest rate of 2.5%.
Additionally, SGBs are traded on stock exchanges, which means they offer also. SGBs can be purchased by resident individuals, HUFs, trusts, universities, and charitable institutions.
Digital Gold: Several companies now offer the option to invest in digital gold, which is essentially an electronic form of physical gold. Investors can buy and sell digital gold online and can also convert it into physical gold if required. Digital gold offers convenience and flexibility, but investors should ensure that the provider is trustworthy, and the gold is backed by physical gold.
It's worth noting that like any investment, gold carries some risks, and its price can be volatile in the short term. Investors should carefully consider their investment goals, risk tolerance, and time horizon before investing in gold.
Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited
