Should you have Gold as an investment in your portfolio?

As Diwali is around the corner, many of you would be thinking of buying gold. This is because buying gold during Diwali & Akshya Tritya is considered ‘auspicious’ and is a tradition. Also, it is considered as a safety net for future financial responsibilities like children’s marriage etc. But have you ever thought about your real purpose for buying the gold? Is it for wearing it as jewelry or as an investment? If it is for wearing as jewelry, then you don’t need to buy it every year and not accumulate it more than required. However, if you are buying it as an investment and as safeguard for your future responsibilities, then I would request you to ponder over the following points:

Gold prices are volatile and very much dependent on global issues like war, political uncertainty etc. Often there are violent swings in gold prices.

In India, the CAGR return on gold in last 10 years is around 8% (including the current surge in gold price). If we take out the last one-year performance, gold had returned only 3-4% in previous 9 yrs. Compare it against other asset classes, equity gave 14 -15% returns despite the ongoing slump for last 12 months. Even FDs has given better return than this.

Although gold is considered a liquid investment, you may face issues while liquidating it such as:
Deduction of wastage and making charges by the jeweler, which could be substantial.
Purity of the gold not as per the declaration when you purchased it.
Gold prices low when you actually need money.
Documentation issues as all the gold transactions above ₹2 lacs must be linked to PAN card

Storage & Safety of gold is also an issue to be kept in mind. You need to spend on keeping the physical gold secure by investing in safety/ bank lockers as well as on buying insurance for it. This means a regular expense on it.

As gold is not produced in India, most of the gold is imported which puts extreme strain on country’s balance of payments situation. India is the largest importer of gold in the world followed by China.

Moreover, gold is not a productive asset like other financial assets. Your investment in other financial assets like equity, bank deposits etc. are used to run businesses
which in turn generate employment and wealth for the people and improves the economic well-being of the country overall. Even the investment in real estate generates business and employment. However, the gold just sits in your lockers and cannot be used as a business generating asset.

By not accumulating gold, you would in fact, be doing a big favour to the nation and help it become economic superpower.

However, after considering all these points, if you still feel that you need to have gold as an asset in your portfolio, I recommend that it should not be more than 5-10% of your total portfolio. For that also, you should not consider buying physical gold but in paper/digital form like Gold ETF, Gold fund of funds, Sovereign Gold Bonds. These take care of all the above issues like liquidity, security, deduction of wastage/making charges.

Some details about these paper/ digital options for gold investing are:

Gold ETF: These invest primarily in physical gold with each ETF unit typically representing 1gm of gold. The equivalent physical gold is held with the custodian bank and valued periodically. The performance of gold ETF is benchmarked against domestic gold price. The returns will follow the gold price returns minus the cost of managing the ETF.
The investors need to have a Demat account and a trading account to buy and sell ETF.

Gold fund of funds: Some MF have started gold funds which are mandated to hold units of ETF. Investors buy units of gold funds like any other mutual fund and these funds invest in gold ETFs to give investors similar exposure to gold. Here, the investor need not have a Demat account.

Sovereign Gold Bonds: These are issued by RBI on behalf of the government. The bonds are denominated in multiples of 1gm of gold; the maximum one can hold is 4Kg. The tenor of bonds is eight years and exit option is available after 5 years. In addition to appreciation of gold prices, you get a fixed coupon rate of 2.5%. The issue price is average of last 3 working days of closing price of 24K gold and similar is the case for redemption price. These are listed on stock exchanges and can be traded also.

In conclusion, I would like to say that since gold performs only during specific situations, it is best to hold a very small percentage of your portfolio in it, not more than 5-10% and that too in paper/digital format rather than physical gold. Sovereign Gold Bonds (SGB) remains the best mode to hold exposure in gold.

Author: Arvinderjit Singh, Managing Partner at Finance First Advisers