Gold- Is it really the best investment?

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Gold! The word evokes so many emotions. Wars have been fought for it since time immemorial. Man has always been an admirer of this yellow metal. He has yearned for it, fought for it & hoarded it. Even today on days like Diwali & Akshay Tritya, thousands of Indians buy more of it. In fact India is the largest consumer of Gold in the world! So much of ‘investment’ being made in gold, is it really the best investment you can make?


Well the answer is no! Gold is a good investment for certain reasons but not the best. Also the type of gold people buy is not technically an investment. Let’s see why-


1.    Gold jewellery is not an investment but a personal asset.
The type of gold ‘investment’ most Indians buy is more in the form of Jewellery. We need to understand that jewellery at the end of the day is just a personal belonging for adornment. It is made in various designs which involve hefty making charges. Also most jewellery is not made with 24 karat gold but mostly with 18 & 22 karat gold. So comparing it with the day’s gold price is irrelevant as most markets display 24 karat gold price. Usually there is sentimental value attached to it & selling is not an option for most. Even when sold it depends on the jeweller buying it to decide value of the jewellery. So how can we say that gold jewellery is an investment!


2.    Gold bars, coins & biscuits
Gold in physical form like bars & biscuits is no doubt a better form of investment than jewellery. There is no making charges & the gold is mostly in pure form. If you plan to buy physical gold no doubt this is the best option. But there are some drawbacks to this form too. Firstly storage is an issue with any physical gold. Physical gold needs to be kept safely & it is highly advised to keep it in any safe deposit or locker facility. The charges for these can vary highly from different banks. Secondly all physical gold has higher capital gain tax liability. The period for long term capital gain for physical gold is 3 years. Long term capital gains tax is much less than short term. So the benefit of less tax in transacting in physical gold comes after holding it for a minimum of 3 years. If you are buying physical gold for a short term trade, which we suggest you not to do anyways, then this comes in your way.


3.    Gold  Exchange traded funds
Gold Exchange traded funds or ETF’s has been growing in popularity in recent years. These are basically gold units similar to Mutual Fund units held in dematerialised form in your depositary participant or demat account. Different Mutual fund companies are offering this & most have each unit worth 1 gram. The benefits of this form of investment are much more. Firstly it is easy to transact. You can buy it easily through your stock broker. Secondly, as each unit is only 1 gram, many middle class investors can actually buy gold in small quantities throughout the year, like a Mutual Fund SIP. Thirdly there is practically no storage cost. Lastly long term capital gain benefits kick in after only 12 months of holding unlike physical gold where it is 36 months i.e. 3 years. So definitely this is a highly convenient way to buy gold.

4.    Finally is gold the best investment?
No doubt in recent gold has given amazing returns, but all investments need to be judged on long term returns. Gold in the long run has just beaten inflation. Historically inflation has been 7% approx & gold has given returns of 8% approx. You may wonder how this can be possible. Well this is because gold is not an investment you buy for high returns but in fact for safety & hedge against inflation. Gold has risen in recent times mainly due to the uncertainty in the financial markets where gold has been always been as the last hedge. So buying gold as investment keeping in mind last 2-3 years returns is not the right thing. The spectacular rise can lead a sharp decline too. Your investments should always be bought with time horizon & financial goal in mind, not to make quick buck & speculation.

Thus if higher returns in the long run are the reason you are buying gold, we suggest you to look at equity. If you are buying it to park your money for 6 months or so, we suggest Ultra short term debt funds. All investments should be made with your financial goals & time horizon in mind. A proper asset allocation should be made among all asset classes. Gold can form a part of it only if you are investing for more than 3 years & ideally it should not form more than 10% of your investments. With these points in mind, you can ‘invest in gold’ in the right way!       

The article has been written by Jai Adiani. The writer is the founder  of Fpguru.com

Comments  

 
0 #9 http:// 2014-05-09 21:18
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well glad to share my knowledge here with friends.
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0 #7 Aniruddha Patil 2011-09-17 17:20
A very insightful article. Sir, I would like to ask you is it advantageous to invest in gold ETF or E-Gold ? Which route should be preferred? The later(E-Gold) is a new product but it has captured the huge market in so short time..

You can also elaborate the pros and cons of both the investments..
Thanx
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+2 #6 Jai 2011-05-09 19:13
Thank you everyone!! We will continue with our efforts ro spread financial enlightment with your support!!
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+1 #5 Kunal Zaveri 2011-05-09 09:26
Good article Sir! Reminded me of the eye-opener classes of Investment Planning in college that you had conducted!
Keep spreading knowledge! :)
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+1 #4 Clyde DSouza 2011-05-07 06:15
Great article Jai you have just broken many misconceptions. Keep up this great website :)
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+2 #3 Gaurav 2011-05-07 05:13
Nice Article.
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+1 #2 Leena Haseja 2011-05-06 17:09
Lovely article and a must read....
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+2 #1 Rahul 2011-05-06 09:18
What an article!! i was just about to buy gold today till I read this!! now can decide properly...
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