Amidst global and domestic market volatility, you may opine that investing in gold is a safe bet, especially, when you know it is a proven way to hedge against inflation. However, the truth is that gold prices usually head north because more and more investors buy gold without reflecting on the real impact it has on your portfolio. Here’s why too much exposure to gold can be harmful and how much of it you should ideally hold.
Gold Is Sensitive To Economic Events
Although gold, the precious yellow metal is valuable, it doesn’t serve investment purposes well. Firstly, gold prices are highly volatile as the metal is impacted by almost every economic factor that effects the country. Whether it is inflation, GDP, war, politics, or even rains, its prices are dependent on such situations and can fluctuate aggressively. Also, keep in mind that you may have to bear additional costs to store physical gold like jewellery, coins, and bars safely. Besides, the only return that you can expect is the difference between the purchase and selling price of gold.
Returns on Gold Are Lower Than Those On Equity
In general, gold prices are inversely proportional to equities. The stock market dips invariably in times of economic downfall. Thus, investors find gold to be a safe haven and pour all their savings into it. However, making an investment decision just on this may not be right. Think on the lines of returns and you will know why. A comparison between both gold and equities have revealed that the former have the potential to yield high returns that are also inflation-adjusted if invested for the long term (5 years and above). Further, if you can’t assume too much risk, you can consider investing in equity funds via SIPs. These have a track record of yielding up to 12% returns, which is much higher than gold at 10%.
How Much Gold Should You Hold?
All this doesn’t mean that you should turn a blind eye to gold, but consider carefully what you allocate towards it. Experts believe that if you enjoy a stable income, your gold investments should not exceed 2-5% of your folio. On the contrary, if you don’t enjoy a regular income, you can push the limit to a maximum of 10%. Moreover, you can choose paper gold like gold ETFs and bonds to cut storage costs and enjoy liquidity. Diversify your investments across equities, mutual fund, and fixed income plans to enjoy better returns and power of compounding.
Gold is considered a safe haven to invest, but it is also highly sensitive to economic policy and may not generate returns as high as other investment vehicles. Don’t buy gold just with an investment objective; instead, hold it for safety and emergency needs.
The writer is CEO, BankBazaar.
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit card, personal loan, home loan, car loan, and insurance.