‘Don’t put all the eggs in one basket’ is timeless advice. And it is particularly true when it comes to investing. One way to create a more balanced and diverse portfolio is to invest in various asset classes, including gold.
How is gold priced in India?
Gold prices in India are determined on the basis of a variety of factors – supply and demand in the market, inflation, import duty, and so on. Another important factor is the value of US dollar. Gold is priced in USD in foreign markets and any fluctuation in USD-INR conversion rate impacts gold price in India.
Why to invest in gold?
- Hedge against inflation: High-inflation phases have seen a surge in the price of gold. Historically, people have purchased gold when they have witnessed the value of local currency fall. As the cost of living increases, so does the price of gold, thus being a relatively safe investment instrument.
- Liquidity: Gold is a highly liquid asset compared to some other asset classes. Moreover, physical gold as well as some of digital gold options don’t come with a lock-in period, unlike other investment instruments.
- Diversification: Investing in gold helps in diversifying your portfolio and is likely to mitigate risks associated with other investment vehicles.
- Availability: You can invest in gold by buying physical gold, digital gold, gold bonds (SGB), mutual funds, or ETFs.
- Supply constraints: Gold is a scarce and precious metal and it takes more than decade for a gold mine to produce resources that can be then refined. According to January 2021 data by World Gold Council, the year 2020 saw the largest annual decline in gold supply since 2013. Mine production also saw a 4% decline in 2020, compared to the previous year. This reduction in supply also plays a role in increasing gold prices.
- Simple investment: Investing in physical gold is simple when compared to other forms of investment. There are generally no heavy jargons involved, no entry or exit loads. Over the past few years, even investing in gold through other means has become extremely simple.
- Simplicity: Buying gold has become very elementary. You can buy gold online as well as offline from shops. Digital gold and paper gold can help eliminate making and melting charges, the risk of theft and concern regarding the storage of physical gold.
As an investor looking to diversifying your portfolio, you could opt for alternatives to physical gold like Sovereign Gold Bonds, gold ETFs, and gold mutual funds. These alternatives do away with the drawbacks associated with owning physical gold and could offer attractive returns, based on the duration of your investment. In fact, if you choose SGBs, you also earn an interest over and above the appreciation in gold price.
If you would like to explore your gold investment options, it is prudent to reach out to a financial advisor who can curate bespoke investment plans that are better aligned with your short-term and long-term financial goals and risk appetite.