1. Why Should You Invest in Gold
Safety, Liquidity and Returns are the three criteria most conventional investors look for before making any investment. While gold meets the first two criteria swimmingly, it doesn’t do badly at the last one either. Here are two main reasons why you should invest in gold:
a. Gold investment is worthwhile because it is an inflation-beating investment. Over a period of time, the return on gold investment is in line with the rate of inflation.
b. Gold has an inverse relationship to equity investments. Example, if the equity markets start performing poorly, gold too would have performed well. Considering gold as an investment option in your investment portfolio will be a buffer to the overall volatility of your portfolio.
2. How to Invest in Gold
The ‘Golden question’ here is, how does one invest in gold. Traditionally, it was by buying physical gold in the form of coins, bullions, artifacts or jewellery. Nowadays, there are more advanced forms of gold investments such as Gold ETFs (exchange-traded funds) and Gold Funds.
Gold ETFs are similar to buying an equivalent sum of physical gold but without the hassles of having to securely store the physical gold. Here, there is no risk of theft/burglary as the gold is in Demat (paper) form. Gold Funds involve making an investment gold mining companies.
Let’s understand different ways of investing in Gold from the table below:
|Gold||Gold ETFs (Exchange Traded Funds)||Gold Funds|
|Investment in physical gold||Investor buys a proportionate value of gold but not in the physical form||The investment is made in bullion and companies involved in mining gold|
|No need for Demat account||The investor needs a Demat account||No need for a Demat account to invest|
|Market fluctuations directly affect the prices of Gold||Changes in the gold prices affect that of Gold ETFs||Changes in the gold prices doesn’t affect Gold funds directly|
|No additional charges other than the physical gold itself||Gold ETFs involve asset management and brokerage fees||There’s a minimum charge to manage the gold funds.|
|Risks of theft and burglary associated with storing physical gold||Gold ETFs remove the burden of trading gold in the physical form||Eliminates the risk of theft/ burglary and buffers investments to changing market fluctuations|
|No paperwork required for investing||Paperwork required for investing in Gold ETFs||Paperwork is required for investing in Gold funds|
|Systematic Investment Plan (SIP) not available||No SIP option
|Best suited for conventional investors||Best suited for investors who have the required time and skill set to trade||Best suited for investors who expect high returns taking calculated risks|
3. What are Gold Funds
Investing in gold funds is to invest in stocks of companies operating in gold and gold-related activities. Funnily, gold mutual funds also include silver, platinum and other metals in their investment basket. A mutual fund manager on behalf of an Asset Management Company manages gold fund, unlike gold ETFs. They utilize the fundamental trading analysis to buy and sell stocks to try to maximize returns for the investors. Returns from gold funds depend on market conditions to an extent.
Gold mutual funds eliminate the risks on returns substantially by distributing investments along with a wide range of investment domains. In other words, mutual funds work on the principle of diversifying i.e. not putting all eggs in one basket. Investors need to weigh their risk appetite and goals before choosing such a mutual fund.
4. Gold Investment vs Mutual Funds
|Particulars||Gold Investment||Mutual Fund|
|Definition||Gold is a precious high-value metal that is liquid in nature||Pools investors’ money in equities, debts and other market instruments to multiply money|
|Management||Investments are made and managed by the investor himself||Experts manage the investment professionally to create wealth and reduce risks|
|Risk Involved||Physical carrying and storage of gold involves high risks of theft and burglary||Investment in mutual funds can be done with safe and secure methods|
|Returns||Gold does not pay any dividends||Mutual funds yield substantial returns to the investor|
|Investment Cost||Taking an average cost of Rs. 31 thousand per 10 grams, one needs to carefully think before making an initial investment in gold; considering the high cost to begin investing||Mutual fund investment is affordable and flexible. One can begin investments from Rs 1000|
Investments of any kind have their own set of pros and cons. For gold investment, the safety and security of physically protecting the gold can be risky and cumbersome. Although investing in gold comes with a bunch of disadvantages, the other viable investment option that one can consider is Mutual Funds. They are also more tax-efficient as compared to traditional investments.