Q. Stock markets across the world are experiencing volatility due to the Covid-19 crisis. Besides, interest rates on various fixed income products are falling. I have some surplus money but do not want to invest in equities. Gold prices have shot up due to the impact of coronavirus on the global economy. Would you recommend investing in gold in the current scenario? Suresh Bajpai
A. For years, gold has remained the favourite investment options for many Indians. The yellow metal is considered a haven during periods of economic uncertainty, inflation and political volatility. Gold as an investment usually tends to provide moderate to low returns but witnesses a surge during volatile and uncertain periods.
Gold is also considered a hedge against inflation. You can invest your surplus in gold, but only after in line with your larger financial goals, risk appetite, liquidity needs and return expectation. Your investment in gold should ideally be about 5% of your portfolio.
There are various reasons people buy gold. It’s a precious metal and is often bought for personal use and investment. However, purely as an investment, you should be very strategic about how you buy gold.
For example, buying physical gold will carry GST, making charges, concerns over purity, and expenses for safe storage. These additional expenses will eat into your margins. Therefore, you don’t need to restrict yourself to physical gold. You could also buy gold ETFs, gold mutual funds, or the government-issued Sovereign Gold Bonds. Demat gold purchased this way carries no purity concerns, needs no safe storage, and can be bought and sold from regulated markets as per your needs.
Also, you need to ask yourself how much gold there should be in your overall investment portfolio. Too much may mean having low returns over the long term, which will drag down your overall rate of wealth creation. Too little may mean not having adequate buffer against volatility. Therefore, start small – up to 5% of your total portfolio – and assess if you need more. Buy at various price points, especially when prices fall, and avoid bulk-buying at elevated prices. Therefore, buying systematically, i.e., buying a small quantity every month, is advisable for small investors.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards.