Akshaya Tritiya: Should you shift away from investing in traditional form of gold?

Lili | May 7, 2019 | 0 | Traditional

Historically, being known for its store of value, gold is often used as a “hedge” against inflation. Riding traditionally on the two main criterions of safety and liquidity, we Indians seem to have a particular affinity towards it (after all, we are the world’s largest consumer!).

Additionally, auspicious occasions like Akshay Tritiya provide people a ‘golden opportunity’ to acquire more yellow metal. But when it comes to investing in gold – it often makes me go back to some very basic questions,

• How much gold should be a part of your portfolio?
• Do you need a shift from traditional gold?

• Do you need to correct your portfolio based on it?

Let me try to simplify these questions.

Given its ‘safe haven’ status, there is little surprise that investors buy gold when there is a sustained fall in the equities or a downturn. At such times, gold provides the much-needed succour.

In such a scenario, how much gold is enough to address your liquidity needs? Ideally speaking, your investment in gold in terms of the percentage of your overall portfolio should not be more than 5-10 percent.

But, over the past few years people have been realizing the challenges in storing gold in a physical form, chiefly being the high risks of theft and burglary. This has led people to explore gold beyond the physical form and explore investing in gold in other forms.

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.

But, one of the biggest hassles that are associated with gold is its fickle nature, and the prices being impacted by a majority of economic factors. Hence, in such a scenario, if one is looking at diversifying the gold risk, then one can also opt for investing in a gold fund.

How does that work?

Investing in gold funds is to invest in stocks of companies operating in gold and gold-related activities. A mutual fund manager on behalf of an Asset Management Company manages the gold fund. 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.

Basically, it reduces the volatility related to gold prices by ensuring that the pool is diversified and all eggs are not in one basket.

Therefore, this Akshaya Tritiya – I will recommend everyone to branch out from investing in traditional forms of gold. After all, gold no matter in what form you own – as long as it glitters, it is here to stay!

(The author is Head, Personal Wealth Advisory, Edelweiss)

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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