In my last post, I promised to share the best way (remember, its according to me) to invest during market turmoil. And that was gold.
The most common way we see people investing in gold is via jewellery or simply gold ornaments. In India, the demand for ornaments fluctuates depending on the festive season, wedding season rather than on economic conditions. Buyers frequently splurge on gold jewellery by convincing themselves that they are investing rather than spending, since the value of the ornaments is likely to increase in the future. While the justification isn’t entirely incorrect, it lacks some important considerations.
Buying jewellery is different from investing in Gold. There are additional caveats attached to it like making charges, which ranges from 5 - 15% and can reach up to 20% which are irrecoverable when we wish to divest from this investment.
The other option is investing in coins and bars. But one should be aware that it comes with a slight premium and the premium increases with the decrease in denominations. Lets take a hypothetical example, 10g of gold coin can be bought at 30,000 INR. And now, if you want to buy 5g coin, its price comes around 15750 INR instead of 15000. That 750 INR is the premium added due to decrease in denomination.
Then what is the better option to exploit the opportunity of investing in gold? That's Gold Exchange Traded Funds (ETFs).
Gold ETFs are mutual funds that invest in physical gold. Each unit of a gold ETF represents 1 unit (or in some cases 0.5 units) of gold. Investors in gold ETFs do not bear making charges associated with physical gold.
Moreover, gold ETFs are traded on the exchange at the prevailing market price of physical gold, which implies that investors can buy or sell their holdings at prices that are close to the market price, without worrying about paying a significant premium on purchase or selling at a discount.
Given the high trading volume at national exchanges, there is no liquidity risk attached to it. Investors can expect the resale value to mirror the market price of physical gold. Below is the list of Gold ETFs listed on NSE.
The most common way we see people investing in gold is via jewellery or simply gold ornaments. In India, the demand for ornaments fluctuates depending on the festive season, wedding season rather than on economic conditions. Buyers frequently splurge on gold jewellery by convincing themselves that they are investing rather than spending, since the value of the ornaments is likely to increase in the future. While the justification isn’t entirely incorrect, it lacks some important considerations.
Buying jewellery is different from investing in Gold. There are additional caveats attached to it like making charges, which ranges from 5 - 15% and can reach up to 20% which are irrecoverable when we wish to divest from this investment.
The other option is investing in coins and bars. But one should be aware that it comes with a slight premium and the premium increases with the decrease in denominations. Lets take a hypothetical example, 10g of gold coin can be bought at 30,000 INR. And now, if you want to buy 5g coin, its price comes around 15750 INR instead of 15000. That 750 INR is the premium added due to decrease in denomination.
Then what is the better option to exploit the opportunity of investing in gold? That's Gold Exchange Traded Funds (ETFs).
Gold ETFs are mutual funds that invest in physical gold. Each unit of a gold ETF represents 1 unit (or in some cases 0.5 units) of gold. Investors in gold ETFs do not bear making charges associated with physical gold.
Moreover, gold ETFs are traded on the exchange at the prevailing market price of physical gold, which implies that investors can buy or sell their holdings at prices that are close to the market price, without worrying about paying a significant premium on purchase or selling at a discount.
Given the high trading volume at national exchanges, there is no liquidity risk attached to it. Investors can expect the resale value to mirror the market price of physical gold. Below is the list of Gold ETFs listed on NSE.
Synopsis
Gold is a safe haven asset, which makes a portfolio more diverse. It’s thus prudent to allocate 10-15 percent of your
portfolio investments to gold; however that should be done after proper consultation with your financial advisor.
However, the potential to earn higher returns should be evaluated in the context of other important considerations. Liquidity is a key factor that should be considered while making any investment. Investors should be able to encash their holdings at any time without compromising on the value.
Easy availability is another important consideration. The investment instrument should be easily available so that investors are able to deploy their funds without any delay. In these aspects, gold ETFs are better than sovereign gold bonds.
However, the potential to earn higher returns should be evaluated in the context of other important considerations. Liquidity is a key factor that should be considered while making any investment. Investors should be able to encash their holdings at any time without compromising on the value.
Easy availability is another important consideration. The investment instrument should be easily available so that investors are able to deploy their funds without any delay. In these aspects, gold ETFs are better than sovereign gold bonds.
No comments:
Post a Comment