scorecardresearchYour Questions Answered: From financial planning for early retirement to

Your Questions Answered: From financial planning for early retirement to investment options in gold

Updated: 26 May 2022, 02:01 PM IST

We try to answer some of your most pressing personal finance questions. It is time to make the most of your money!

Your Questions Answered: From financial planning for early retirement to investment options in gold

Your Questions Answered: From financial planning for early retirement to investment options in gold

Q1. I’m a 32 yo Sales Manager. I get paid well and like my job okay. But I hope to retire early and start a venture of my own sometime. How do I ensure I have accumulated enough corpus before taking such a plunge? I’ve been investing in mutual funds & FDs for 5 years.

-Nidhi Parab, Nagpur

It’s commendable that you have already taken a step in that direction. Now considering that you’d be more worried about growing your business than profits at present, we would advise you to start goal-based investments for your other commitments such as child education, retirement, etc.

You probably already have these investments, so you can now think of ways to amp up them to achieve early retirement and make your passion a full-time job. This approach is popularly known as FIRE.

Start by assessing your current investments and liabilities and arrive at your target corpus. As you are a double-income family, you could also discuss your individual goals and then agree upon a method to share the responsibilities.

Accumulating enough corpus to take care of your future expenses and responsibilities begins with financial planning. Here are a few things you could ensure for early retirement to pursue your other interests:

  1. Accumulate passive income instruments such as rent, interest income, and capital gains from your portfolio which has real estate, stocks, bonds, gold etc. Diversify your portfolio to ensure a good risk-return ratio.
  2. Calculate the Future Value of your expenses or the age you want to retire. We recommend considering 7% annual Inflation.
  3. Now if you choose the future value which is your target, start investing in financial products as per your risk profile. For example, index funds for moderate risk appetite and small caps for high-risk tolerance.
  4. Always invest in Direct Plans. The 1-2 % commission fees saved on a year to year basis become a significant contribution to your overall corpus.
  5. With every pay increase instead of splurging, put that money into your investments. Remember your objective! Top up your SIPs every year. We generally recommend 10%. When you see growth in your business, start generating capital through a SIP or lumpsum.
  6. We hope at this stage you have this covered. But if you don't, buy health Insurance with adequate cover and Term life Insurance.
  7. Pay off all your liabilities.

Also understand that this method requires a lot of understanding, sacrifices, and a plan with a well-crafted strategy. We hope this helps you get started. You can also seek a financial advisor for in-depth planning. All the best for your venture!

Q2. I’m a 27 yo freelance commercial photographer. I invest in mutual funds and ETFs and am not exactly a fan of gold. But my family has been suggesting that I invest in gold for future plans. I’m not completely sold on its prospects though, do you think it is a good investment? How much is safe to invest in gold?

-Srinivas Prabhala

Gold is a highly liquid instrument with attributes of both commodity and currency, so yes it can be a good investment option. If you have goals such as a wedding on the horizon, it can be beneficial to invest in gold in advance.

Here is why gold stands out from your other investment instruments:

  1. Low correlation with equity markets. What better examples than now! As we near inflation and our MFs & stocks and digital currencies look worrisome, gold is surging at 52,265.00. Gold has positive and inflation-beating expected returns in the long run while having a very low correlation with equity markets. So it does well in times of distress in the equity markets – times such as a pandemic, war, trade war, etc.
  2. Gold returns only through price movements. It doesn’t generate returns through interest, dividends, or profits like other financial asset classes. But What gold lacks in returns, it more than makes up for in correlation and thus diversification benefits.
  3. Gold is priced in USD and thus also acts as a currency hedge against INR depreciation.

Now, coming to how much should you allocate in gold as an asset class?

  1. You may already have a gold allocation through family jewellery. Assess how much you need to allocate.
  2. Increase your gold allocation for the right reasons – to diversify your portfolio and to add an INR depreciation hedge. Buy the gold at market price and keep it in a secure vault for you.
  3. If you already had a substantial gold allocation, then this is the time to sell parts of it to rebalance into debt and equity. Wait for the right time though. Timing your entry and exit in gold investments maximises your returns.

If you do not find gold ornaments appealing and are looking for more liquid gold investment, there are other options like Digital gold, Gold ETF, Sovereign Gold Bonds (SGB), Gold mutual funds, etc.

Sovereign Gold Bonds (SGB)

Sovereign Gold Bonds don't carry the same risks that physical gold, but it does entail market risks. It gives you a guaranteed annual interest at the rate of 2.50%. You can trade them on stock exchanges, avail of tax benefits, and even use them as collateral against loans.

Digital Gold

The benefit of Digital gold is that it lets you buy 24K 99.9% pure gold online in denominations as low as 100. It’s much like physical gold, but you don’t have to worry about purity, making charges, safe storage, or ease of selling.

Gold ETF

One unit of the gold ETF represents a gram of gold. They closely track gold prices and are tradeable on the stock exchange.

Gold Mutual Funds

Gold Mutual Funds are funds that invest in gold ETFs to track their performance.

However, note that the NAV for Gold ETF or Mutual Funds is computed after deducting the fee of the asset management company plus storage and custodian charges, which can all add up. Over time this can create a significant mismatch in gold returns and that of the gold ETF or Mutual Fund.

Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.

Kuvera is a free direct mutual fund investing platform.

Comparison between digital gold, gold ETFs and gold bonds. 
First Published: 26 May 2022, 12:34 PM IST