Gold is in fashion again, and is an important part of investors’ portfolios, writes Deepak Gagrani
Gold has traditionally been one of the most preferred investments for Indians. While it always enjoyed a sizeable allocation in most Indian investor portfolios (in the form of jewellery), the range-bound movement of gold prices from the period of 2010 to 2018, generating negligible returns, led to a declining trend of investors adding this asset class in their portfolios. However, gold has generated spectacular returns of more than 20% in the last year, and that has again triggered investor interest in the last few months. While there are multiple reasons for the recent rally, the crux is that global investors are heading towards safe havens in times of uncertainty. In our view, this is the start of a multi-year bull run in gold prices and investors can continue to look at this asset class depending on their risk profile.
Investing in gold
The golden question is, what should be the appropriate way of investing in this asset class? Traditionally, Indians have relied on jewellery (including coins and slabs) as the preferred mode of investing in gold. One of the popular ways is to invest in the monthly schemes of local jewellers, which would help them make staggered investments. However, the recent incident of a popular jeweller in Mumbai going bust has left investors shocked, more so with the uncertainty over the recovery of their principal amount too. Such unfortunate events highlight the need for making investments in regulated instruments only.
One of the most effective forms of taking exposure in this asset class is through ‘E-Gold’. This could be in the form of Gold ETFs, Gold Mutual Fund investing in gold ETFs or sovereign gold bonds. Such instruments offer significant advantages over traditional forms of investing in physical gold
Physical gold products attract a significant upfront cost in terms of making charges and statutory taxes which can be in the range of 10-15% of the total cost, depending on the type of product, thereby increasing the overall cost of investment. However, there is no such charge in case of e-gold products. The only exception being that Gold ETFs attract brokerage charges, typically less than 1%, when they are purchased through stock exchanges.
Unless certified by reputed organizations, it is challenging to ascertain the purity of the gold used in physical gold products. There is no such issue with e-gold products where the value is based on 24-carat gold prices quoted on the Multi Commodity Exchange of India (MCX)
Physical gold products incur storage costs which can be significant at times and is also cumbersome to manage on a regular basis. E-gold products are easy to handle as they are mostly in dematerialized form and hence carry very negligible holding costs. Some e-gold products such as Gold Mutual Funds may have annual management charges which could be in the range of 0.2% to 0.75%.
It is generally observed that jewellers quote a sizeable spread for gold prices; ie, there is the difference between the rate at which they will buy back gold from investors and the rate at which they will sell, thereby increasing the overall cost of investment. In the case of e-gold products, there is no question of spread as both the purchase and sale happen basis the quoted prices on the MCX.
Gold plays an important role in overall portfolios of investors, especially during times of uncertainty, and is a natural hedge to other growth assets such as equities and real estate. Hence it is important that each portfolio should have at least 5-10% allocation to gold.
One must note that jewellery is not a pure investment and hence shouldn’t be included in investment portfolios. E-gold products offer a great option to take exposure in this asset class, with the flexibility to invest in a staggered manner and with materially lower incidental costs.
Disclaimer: The opinions expressed in the article are for general informational purposes only and are not intended to provide specific investment advice or recommendations. Investors must seek advice from their respective financial advisors for making any investments.