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What next for Gold Investors?

Are your gold investments headed in the right direction?
A simple Google search on “future of gold investments” reflects how deeply divided the investor fraternity truly is with regard to investing in gold. Indians’ emotional attachment to this precious yellow metal further complicates their relationship with gold. For us, gold is more than just the monetary value it posits. A lot of us inherit gold from our parents (who may or may not have themselves inherited it), making it a family heirloom, thereby increasing its significance and emotional value manifolds. But even then, considering gold as an investment instrument is quite popular in India.

Why do Indians invest in gold?
Economic Times conducted a survey during 30 Nov to 1 Dec 2016 to understand people’s relationship with gold. The survey was conducted on the heels of the government’s demonetization drive and amid news that the government was further considering crackdown on gold ownership. On being asked in what form do they own gold, respondents chose jewellery- inherited (67.90%), jewellery- self-bought (67.20%), gold coins and bars (29.20%), gold ETFs and funds (9.20%) and sovereign gold bonds (5.50%). One of the main reasons behind purchase of gold (irrespective of the form) was personal use (55.10%), hedge against uncertainty (37.40%) and diversify portfolio (31.80%). The rationale “hedge against uncertainty” is one of the primary reasons world over.

Is investing in gold wise?
This is a very tricky question to answer. Gold is more suited for a risk-averse investor worried about inflation and rising cost of living. While buying gold in the physical form as jewellery, bars and coins may not yield immediate and visible returns, it does come in handy during times of duress and financial difficulty. During a financial crisis, gold might be able to help you sail through while other investments (such as stocks, bonds and real estate) may not due to severe corrosion in their value.
Must Know: Check current gold price in India at PaisaBazaar How can you invest in gold?
Bank coins are not a great investment idea as they invite bank charge of 5%-10%. Compound that with the fact that gold coins have lower liquidity as most banks do not buy back the coins, buying them doesn’t do you much good. When it comes to investing in bullions or gold bars, it’s usually not a common investor’s cup of tea as even the minimum investment amount is very high.
Apart from buying gold in the physical form (i.e., jewellery, bars and coins), there are several other ways to invest in gold:
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  1. Gold exchange-traded funds (ETFs): These funds are a type of mutual fund that invests in gold. To invest in these, you would have to open demat and trading accounts and buy ETFs from the stock exchange.
  2. Goldfundoffunds:ThesefundsinvestinGoldETFsonyourbehalfwithoutyoubeing required to open demat and trading accounts.
  3. Equity-basedgoldfunds:Thesefundsdonotdirectlyinvestingoldbutinthe companies involved in the mining, extraction and marketing of gold.
  4. E-gold:YoucanbuygoldelectronicallyindematformfromNationalSpotExchange Limited. This gold can also be converted into physical gold for free.
  5. Sovereigngoldbondscheme:Thisschemewaslaunchedbythegovt.ofIndiaasan alternative to buying physical gold. The money invested is safe as you will received the proceeds based on the current market price of gold at the time of bond maturity or premature redemption.
What are the major pros and cons of investing in gold?
Gold scores over all other investment instruments with regard to liquidity. If you are in urgent need of cash, you can convert your gold into money any time of the day. You can approach banks, non-banking financial companies (NBFCs) and even jewelers. But in this case, what you will get is essentially a gold loan. That is, financial institutions and jewelers will keep your gold as collateral and return it when pay off your loan in full. In contrast to this, electronic gold is much friendlier as you won’t have to pledge any gold. But the cap of minimum investment tenure or the withdrawal process may prevent you from getting your hands on money immediately.
While we consider buying gold as an investment, the government doesn’t and so there are no tax benefits. If that’s not enough, gold comes under the category of capital gains.

What should gold investors prepare for?
Gold prices do not move in isolation and are often influenced by regulatory changes (whether domestic or global), US dollar value, the metal’s demand-supply and global economic scenario.
1. WiththeUSfederaldebtexpectedtoincreaseandChina’shousingbubblepeaking, gold prices are likely to increase.

2. According to World Gold Council, China and India are two of biggest demand centers of gold, accounting for approx. 60% of the global demand. With both the markets going through a slump phase in 2016 due to multiple factors, demand is expected to pick up. This has already been noticed in India since the dissipation of demonetization-related problems.

What gold investment strategies should one follow?
1. The balancing act: One of the important things to keep in mind when investing in gold is that the metal should not overpower your portfolio. In the case of individual investors, gold should comprise just 5% to 10% of their portfolio. But, of course, the actual worth of this percentage share will change as your portfolio grows. So, it’s important to periodically rebalance gold’s share by buying or selling it that the percentage value of gold (in terms of percentage) with respect to the overall portfolio remains the same, irrespective of the decline or incline in gold prices. If you are able to follow this simple rule you will be better placed to deal with any economic uncertainty. This strategy will help you benefit from gold’s volatility without impacting your overall portfolio and, in turn, the corpus.
2. Inforthelonghaul:Anotherthingtokeepinmindisthatgoldgoesthroughphasesof highs and lows, similar as a stock market. So, while today gold might be trending high, it may not be case tomorrow and vice versa. If you want to invest in gold, stay put for the long term because a quick exit strategy may not work.
With investment in gold becoming easier by the day (latest option being Paytm’s digital gold offer), it’s important to not get swayed. Before investing in gold, ask yourself this: are you investing to diversify your portfolio or because everyone else is investing in gold? If it’s the former, you’ll be fine but if it’s the latter then you may end up harming yourself more than benefitting. 

Disclaimer : Article written by Guest Author from PaisaBazaar.com


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