There are 2 primary reasons why you need to invest in gold :
Investing money in gold is worth because it is a hedge against inflation. Over a period of time, the return on gold investment is in line with the rate of inflation. It is worth investing in gold for a one more very valid reason. That is gold is negatively correlated to equity investments.
Say for example 2007 onwards, the equity markets started performing poorly whereas the gold has performed well. So having gold as an investment option in your portfolio mix will help you reduce the overall volatility of your portfolio.
Return on gold investment :
This investment proved remarkable from 2010 to 2015.During that time span Gold has given average return of 29% per annum which was any day better than other investment options.
However, the long term average return on gold investment is less than 10% p.a. As one can say technically or ironically but history always repeats itself. Therefore, we may once again observe the similar less than 10% appreciation pattern in gold prices in near future.
Still, if you want to invest in Gold and cannot resist yourself from the temptation then these are few tips on how to invest in gold correctly!
1) Jewelry :
buying Our age-old and traditional way of investment is jewelry buying where one can buy gold ornaments, bars or coins. However, it has its own disadvantages, total buying cost involves heavy making charges (it can be 10 to 20% of total cost).However, when you try to sell the same piece to same jeweler, he will buy it below market rates and deduct those making charges from the total price of your jewel.
2) Investment in Gold coins and bars :
Investment in gold coins and bars is also a better option over jewel buying. You need to decide on ‘Where to buy gold coins or bars?”. You should buy gold bars and coins only from jeweler. Banks also sell gold coins or bars.
Then why do we advocate for buying god bars and coins from jewelers? To answer this question you ask yourself “How to sell gold coins or bars?” or “Where to sell gold coins in India?” Banks sell gold coins and bars, but they cannot buy it back. Whereas, the jewelers can buy back the gold coins from you.
How to invest in Physical Gold? The point 1) and 2) could have proved that it is better to invest in the physical gold by way of gold coins or bars sold by the jewelers. In the next points 3) and 4) we will discuss about the paper gold investment options in India.
3) Gold ETF :
What is Gold Exchange Traded Fund? Gold exchange traded fund is a type of mutual fund which in turn invests in gold and the units of this mutual fund scheme is listed in the stock exchange. How to invest in Gold ETFs in India? You need to buy Gold ETFs from the stock exchange by way of opening a demat account and trading account. You have to pay brokerage fee (which is generally between 0.25% to 0.5%) for buying and selling of these Gold ETFs. You will have to further pay 0.5 to 1 % charges as fund management charges.
4) Gold Fund of Funds:
What is Gold Fund? Gold fund is a Fund of Fund which will invest in Gold ETFs on behalf of you. Best part here is that you do not require holding any demat a/c here. Then how to invest in Gold Mutual Funds? Just like investing in other mutual fund schemes. As this is like any other mutual fund scheme, SIP investment in gold is possible through these gold funds.
If you are buying in less quantity then gold mutual funds may be suitable. If you are buying in more quantity then you can negotiate for the lesser brokerage charges from your stock broker, hence gold ETF may be suitable.
5) Equity based Gold Funds:
Here these funds are directly not investing in Gold but investing in the companies, which are related to the mining, extracting and marketing of the Gold. Besides, its performance is purely dependent upon the performance of the fund house and the equities they are investing. In the other 4 options, your investment performance will be directly linked to the price movement in gold.