With the festive season around the corner, many of us might be buying gold or thinking about buying gold.
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Gold is still a favourite for a lot of investors. And, why shouldn't it be?
Gold has generated decent returns over the past few years and we can't ignore the emotional aspect. We hear gold prices reaching a new high almost every few months or so.
And so a lot of investors are looking at gold as an investment avenue.
So, in this blog, we will see how investors usually invest in gold, the pros and cons and the best way to invest in gold.
Ways To Invest In Gold
Before we look at the different ways to invest in gold, let us see the importance of gold in an investor's portfolio.
Hedge Against Inflation: Typically, gold beats inflation over the long term as it is a real, physical asset.
Diversification: Gold investments can help investors optimise their portfolio returns as gold performs well when the stock market is on a downward trend.
Now, let us look at the different ways to invest in gold.
Jewellery: Buying gold jewellery might come with a sense of security and can act as a hedge against inflation. You can wear it as well.
Pros:
- Offers a sense of security
- More liquid than assets like property
- A reliable hedge against economic uncertainties
Cons:
- Making charges are excluded from the final value
- Storage expenses
- Possibility of theft
- Lower liquidity compared to other financial assets
Sovereign Gold Bonds: These bonds were offered by the government and come with an opportunity to earn interest and gain through capital appreciation. Since these are backed by the government, SGBs are considered a safe option to invest money in gold. However, the government has scraped the issue of new sovereign gold bonds. You can buy SGBs from the secondary market when these bonds become available in the secondary market.
Pros:
- Safe investment backed by the government
- Potential for decent returns
- Assurance of purity
- No storage hassles
Cons:
- Long lock-in period. Matures in eight years
- Capital gains tax on premature withdrawals
- Susceptible to gold price fluctuation
Gold Exchange Traded Funds: Gold ETFs allow investors to take benefit of the price movements of gold and invest in it without physical ownership or storage issues.
Pros:
- High liquidity
- Portfolio diversification
- No need to physically buy or store gold
- No making charges, with purity assurance
Cons:
- Subject to market risk
- Can be only traded during stock market hours
- Demat account is required
- No Systematic Investment Plan (SIP) facility
Gold Mutual Funds:
Gold mutual funds are yet another way to invest in gold without actually getting into the hassle of buying or storing gold. These mutual funds further invest in gold ETFs. This can be an effective investment option for investors without a demat account.
Pros:
- Can invest in smaller amounts via SIPs
- Easy to access
- Hedge against inflation
- Diversification of portfolio
Cons:
- High expense ratios
- Subject to market risk
- Taxes implications on capital gains
Should You Invest In Gold? Which One Is Better: Physical Or Non-Physical Gold?
Looking at increasing tensions in the Middle East, economic uncertainties, rising inflation and lower interest rates in the US, the gold prices are expected to rise even more in the near future.
The decision to invest your money in gold will depend on your:
- Individual goals
- Risk tolerance
- Overall asset mix
If you think you need to add safer and more liquid assets to your portfolio, gold can be an ideal option to invest in.
Also, you can explore gold mutual funds or ETFs instead of just adding physical gold to your investment portfolio because it is an effective way to invest in gold.
So, are we saying that you shouldn't buy gold jewellery? Not really. You can buy gold as a piece of jewellery for consumption purposes but it might not be an effective way to invest in gold.