Forex Trading Library

Gold in India: Is It Still a Good Investment Option?

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If you are an avid follower of the e-commerce industry or investment-savvy or just happen to be up-to-date on news, you would know that Paytm has come up with the concept of digital gold. Yes, you heard that right – from digital money we have now moved on to digital gold.

India is one of the largest consumers of gold in the world, and our love for gold has never really taken a backseat. From using gold as a means of adornment or an investment instrument, or even both, we have always held it in our portfolio.

Gold as an investment instrument

According to a 2016 report by World Gold Council, Indian investors view gold bars and coin as a safe investment, almost at par with savings accounts. Here are a few  ways in which Indians invest in gold:

  • Gold Jewellery: Indians love to invest in gold in one of the traditional ways, gold jewellery. Since gold is considered to be a status symbol, many people love to wear gold jewellery too. They purchase gold jewellery and wear it on a daily basis and sell it later when gold appreciates in price or if they face a cash crunch. The gold rates are a key determiner of how the rates of this jewellery piece trend. When the gold rates are high, the cost of the jewellery increases and when they are low, the cost decreases.

It is easy to purchase or sell gold jewellery in India unlike real estate assets and other investments as it does not require a lot of documentation. Less documentation is one of the primary reasons for purchasing gold jewellery as an investment. Leading banks provide locker facilities where people love to keep their gold jewellery to keep it safe when it is not in use. Gold jewellery is usually made out of 22 carat gold while 18 carat gold is used to make diamond-studded gold jewellery.

  • Gold Coins/Bars: When it comes to investing seriously, many people prefer to purchase gold coins and bars. Leading banks and jewellers sell gold coins and bars that the customers can purchase with minimal documentation. These gold coins and bars often come with a certification to endorse the authenticity and purity of gold. The certificate attests that the coins/bars are made out of 24 carat gold, which is its purest form. Gold rates have a more potent say in the price of gold coins or bars as compared to jewellery. This is because the coins and bars are pure gold and the prices can easily move with the gold rates. Jewellery, on the other hand, includes other previous stones whose rates move differently than gold rates.

Gold bars and coins can be bought in multiples of 50 ranging from 0.5 g up to 1 kg. One of the advantages of investing in gold bars or coins as compared to gold jewellery is that the buyer does not have to pay any production charges (that are levied on gold jewellery). The price that the customer pays to make the purchase goes entirely into the amount of gold bought.

  • E-Gold: Since security can be an issue for many people when it comes to gold, the option to invest in e-gold or digital gold is also available for people in the country. No physical gold is traded on the National Stock Exchange (NSE), and yet investors reap the benefits equivalent to investing in physical gold. People do not have to worry about keeping the gold safe in lockers or hidden drawers. Gold rates also play a key factor in the price of e-gold.

The Government of India issues Sovereign Gold Bonds to interested customers. Customers also earn interest semi-annually when they decide to invest in such gold bond schemes. These bonds are easy to buy and sell as well.

The important milestones in the history of Gold

There are a few more ways to invest indirectly in gold such as investing in the equity-based gold funds. Here, the customers invest in the mines and market gold. However, it is not very popular among Indian investors since it is considered to be a high-risk investment. However, the returns on the investment come from the performance of the funds irrespective of the increase or decrease in the current gold rates.

Gold in India

Is gold a good investment option?

To evaluate a commodity’s or a product’s investability one need only look at its returns. So, for instance, till some time back FDs, especially tax-saving FDs, were on top of middle class’s investment list. However, now with FD returns hovering around 7%, the product has lost its sheen. Another instrument that always seemed to touch the chord with middle-class investors was Public Provident Fund (PPF). But this too paints the same picture as that of FDs. As a result, middle-class investors find more comfort in investing in gold.

One thing that needs to be kept in mind when investing in gold is that one has to be invested for the long term and not short term. Gold is a cyclical investment, therefore, to expect the metal to be always high-performing will be naïve. There will phases where the metal will yield great returns while there may also be times when it will underperform. So, if you are not looking for immediate results and are a patient investor, gold can be one of the instruments to invest in.

How much should you invest in gold?

One thing that is certain about investing in gold is that the metal is there to help you during times of uncertainty or crisis. Therefore, it should be treated as one of the instruments and not the only investment instrument. Gold should be a part of your portfolio irrespective of whether you belong to the middle class or not. An ideal investment portfolio should only allocate 5%-10% of the overall portfolio to gold. Note that physical gold essentially does not yield any income during the tenure of the possession and is a safe haven for tough times. So, a percentage share of more than 10% may not really help you in achieving your financial goals.

To sum up, while investing in gold is a good option for the middle class it should not be the center of their financial planning and investment strategy.

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