How to Invest In Gold? The Only Investment Guide You Need in 2023

8 min read • Published 13 November 2022
Written by Vaibhav Khandelwal
Invest in Gold and Diversify Your Portfolio to Mitigate Market V

India has a long history of investing in gold. It is seen as a precious metal and signifies a wealth source. The gold treasure was first discovered in a Bulgarian burial site in Varna, which dates back to 4600 BC to 4200 BC. However, the way of investing has evolved with time. Earlier, people invested in gold by purchasing it physically, like gold bars, jewellery, coins, etc. Now, they have diverted to digital routes such as SGBs, digital gold, and exchange-traded funds (ETFs), and gold-based funds have simplified gold investment. 

Gold investments have acquired relevancy because they correlate with different asset classes. Correlation is a statistic explaining the relationship between the prices of two asset classes. Let us take an example regarding gold and equity. Since their correlation with equity is low, the cost of gold does not fall.

So, expert investors recommend investing across different asset classes like bonds, real estate, gold, stocks, etc. We are here to help you understand how gold, as an asset class, will offer diversification benefits and help you bear the stock market volatility and rising inflation.

Investing In Gold As An Asset 

To create a quality portfolio, you should continuously diversify your investments as much as possible. Diversification involves allocating your money to different asset classes so that your portfolio returns do not fall drastically when a particular asset class fails. A perfect example of diversification would be investing in gold and stocks together. Diversification may help you get maximum returns while minimising your risks. 

Gold is an asset that is considered very pious and carries a legacy. It is an investment or a way to earn money and holds emotional and social value to Indians. Almost every auspicious occasion includes buying gold. It makes the investment portfolio financially diverse and helps overcome inflation and currency risk.

Let us list down certain benefits of investing in gold:

Inflation Hedge 

Inflation refers to a situation in which goods and services prices go up. So, when there is a rise in inflation, the purchasing power of money goes down. To understand what purchasing power is, let us take an example. Suppose you have Rs.500 and buy a pair of jeans today. Next week, the prices of goods will go up due to inflation. Now, the same pair of jeans will cost you Rs.600; therefore, your Rs 500 will not be able to buy the same pair of jeans. This means the purchasing power of your Rs.500 has gone down. 

Returning to gold as inflation protection, gold prices rise simultaneously when inflation increases. Hence, your gold investment may not be negatively affected by inflation.

Also Read: Gold ETFs: Features & Benefits, Investment Process & Tax Efficiency

Liquidity Benefits

Securing cash by selling gold is relatively convenient and uncomplicated, both physically and virtually. Comparatively, other assets like real estate investments may be sold slower. Hence, gold investments offer high liquidity because it is easy to find keen buyers.   

How Gold Prices Protect Against Stock Market Volatility?

The price of gold depends on demand & supply, interest rates, and investor behaviour. Some people invest in gold, thinking its purchasing power will increase with time. When the economy is volatile, for example, during covid, the investors panicked and pulled the stock market down, and the price of metal surged by 4%.   

Gold investment is a haven for all types of investors, mainly during the crisis, because it helps in aiding the macroeconomic and financial risks. Gold acts as a hedge against the market’s volatility because the prices are not affected by its relation to the movement in the stock market.

What are the Disadvantages of Gold Investment?

Though gold is the first thought that comes into our mind while considering investments, it carries a few disadvantages too. Here is a list of the points that you need to consider before investing in gold:

Making Charges

It is a bad idea to buy jewellery as a mode of investment. The reason is you have to pay making charges on the jeweller, and while selling, the jeweller does not consider the making charges, which leads to a loss to the investor.

Brokerage charges

If you buy ETFs, they may carry the management and brokerage charges, making them costlier than the market price of the gold.

No regular income

Investing in physical gold does not offer any permanent income such as interest, dividends, etc. However, it provides regular payouts if invested in mutual funds, stocks, etc.

Storage issues

Gold is a precious metal. The risk of theft is always present; therefore, storing gold in a safe vault is a task. If you choose to keep the gold in the bank locker, you must pay additional locker maintenance charges at regular intervals.

Different Ways Of Gold Investing

We have discussed how gold investments benefit you. Now let us discuss various means of investing in gold to optimise the benefits:

Physical Gold

The traditional way of buying and holding gold is an investment in physical gold. 

Gold Exchange Traded Funds

This is a way of holding gold without storing it. Buying a gold ETF is equivalent to investing in the metal. In most cases, one ETF is considered one gram of gold. 

Gold Mutual Funds

In this case, you will invest in gold reserves rather than the actual metal. 

Digital Gold

This involves the trading of gold on a digital platform. You will be holding virtual gold then. 

Gold Schemes

Different jewellers offer these schemes. The investor is responsible for making a defined payment for a limited period and will get returns based on those.

Sovereign Gold Bonds

Introduced by the RBI, this is another option for investing in gold. These bonds allow investors to choose their form of gold investment. You earn an interest of 2% on SGBs over and above the appreciation in gold price (if any).

Read More: Gold Mutual Funds: Basics, Things to Consider & Other Details

How Much Should You Invest In Gold?

A portfolio constructed in a way that helps us meet our financial goals, be it short-term, medium-term or long-term, requires consideration of all the investment objectives and constraints, starting with the risk you are willing to take for the return you wish to earn. 

Many investment experts think an ideal portfolio should allocate 10% to 15% of its funds to gold. However, there is a lot more to this. So, we have listed specific schemes that can assist you in deciding the percentage allocation for gold in alignment with your portfolio aspirations.  

The 5% to 10% Allocation Approach

Are you confident about the economists’ estimates of our country’s GDP growth rate? If yes, you can invest 5% to 10% of your portfolio as a precaution against any mishap. This could be a suitable percentage because you will use it as a cushion for your portfolio from giving a negative return. In addition, this gold investment can act as insurance for you if the other asset classes experience a downswing. 

The 15% to 25% Allocation Approach 

If the current economic performance and standards cannot inspire your confidence to invest in risky asset classes, then investing a comparatively higher portion of your money in gold investments would be advisable. If you are worried about the effects of inflation and its effects on financial markets in your investment portfolio, then an investment between 15% to 25% in gold shall suffice. 

The 30% to 50% Allocation Approach

This approach is for you if you are highly unconvinced about the economy’s growth and the financial markets. Let’s assume that you think that the economy may crash. You think the markets will fall due to rising inflation, causing extreme chaos in the financial markets. In that case, you may invest 30% to 50% of your money in gold investments. Gold is known for providing relatively higher returns during market turmoil; otherwise, it provides returns similar to other asset classes. So, portfolio reallocation from time to time may help you. 

Also Read: NSC Post Office Interest Rate

Final Words

There are several ways in which you can invest your money in gold. However, it is essential to remember that you must balance it with other asset classes in your portfolio. A portfolio with more than one asset class offers no diversification benefit.

Before investing in gold, you should keep certain things in mind:

  1. If you purchase physical gold, have a safe place to store it.
  2. If you invest in SGBs, you gain from gold price appreciation and earn an interest of 2.5%.

Frequently Asked Questions (FAQs)

Is gold investment in India advisable?

Yes, it is helpful to invest in gold in India. Like in different countries, it also provides an inflationary hedge in India. In addition, it will also help your portfolio endure the turbulent equity market conditions because of its low correlation with equity.

What factors affect gold prices?

Economic factors like inflation, change in gold prices globally, and interest rates affect gold prices. Additionally, the government’s gold reserves and the jewellery market also play a role in the price change.

How much should you invest in gold?

The amount you want to invest in gold will depend on your financial goals and other factors like your risk appetite, expected return, time horizon and liquidity requirements. Hence, no straight-jacket formula for gold investments can be applied to everyone.

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Vaibhav Khandelwal

Credit Principal
Vaibhav is Chartered Accountant by profession, having experience of 4+ years in banking & finance sector. Since past one year associated with Wint Wealth as Credit Principal. Previously worked with Northern Arc Capital for 2 years in FI-Credit Team and AU Small Finance Bank for 1 year in LAP-Credit Team.

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