Gold is considered to be both auspicious and precious in India for various reasons. If you’ve grown up between the 1950s and 1990s, you’d know that gold was a benchmark of societal standing and worth.
However, investors can now buy assets that can generate lucrative long term returns, like stocks, and passive income, like mutual funds or P2P lending. So... how does gold compare to these investments?
Well, there are several benefits and risks to owning gold, as we’ll see in this story. But gold prices fluctuated a lot in 2020. So without further ado, let’s find out if gold is a good or bad investment in 2021.
5 Benefits Of Investing In Gold
1. Stable Price
Gold prices do not fluctuate much even during a crisis compared to other assets like stocks. Investors thus prefer to add gold to their portfolio to take advantage of the stable price and steady growth in value.
2. Easy To Buy
It’s easy to buy gold from any trusted jeweller if you have the capital required. But it’s important to buy gold that has assured purity. You can buy gold in the form of jewellery, gold coins, or gold bars.
3. Better Versus Inflation
Fixed deposits cannot outperform inflation like gold even though both of these investment options are preferred traditional assets. Historical data suggests that gold does well against inflation during economic highs and lows.
In fact, when the economy goes down, currency prices go down. If the currency has little to no value, gold prices will soar simply because gold will be priced using the same currency unit. This implies that gold is one of the best ways to hedge against inflation.
4. Steady Growth
The fact that it is a finite metal doesn’t seem to affect the price of gold. Its value is known to consistently rise over the long term. However, gold prices can be volatile over the short term.
5. Easy Loans
Gold can be used as collateral for secured loans. It is easier to get a loan against gold because it is a tangible asset with a high value. This can be helpful in the time of an emergency.
Apart from these 5 benefits, the sentimental value of gold cannot be overlooked. Gold is often passed on through generations and it is associated with weddings and other such meaningful events.
Risks Of Investing In Gold
Gold investments come with their own limitations. Here are some of them:
1. Security Concerns
Physical gold assets like jewellery are always prone to theft due to high prices and value. Digital gold could be an option for investors who want to get the same benefits of physical gold without security concerns.
2. Storage Concerns
Storing physical gold in the form of jewellery or coins can be a hassle since:
there’s always the risk of theft and robbery
It may need a dedicated safe
Alternatives like digital gold, gold ETFs, etc. do not carry storage concerns as they are paper gold investments.
3. Making Charges
Gold may be easy to buy and sell, but it comes with commission issues. Making charges may increase the overall cost of your gold jewellery purchase. You might even have to pay a fee while selling your gold.
Gold ETFs fare better in this aspect. Gold ETFs invest in gold bullion and can be bought and sold like shares. In general, ETFs carry a low expense.
So if you want to invest in gold without paying the making charges, your options include the likes of Gold ETFs, sovereign gold bonds, digital gold, and others.
4. Purity Concerns
The actual value of gold lies in its purity and is measured using ‘Carat’ (K). 24K is the purest form of gold available. Purity concerns can be avoided if you purchase gold from a reputed and trustworthy seller.
Furthermore, you don't have to stress about purity concerns if you invest in paper gold as they simply track the price of gold bullion.
5. No Passive Income
Physical gold investments do not generate passive income like stocks, mutual funds, or P2P lending. This could be a concern if you’re thinking of retiring early or looking for a way to supplement your income with your investments.
The only way to get a profit out of your physical gold investments is by selling them.
Historical Returns Of Gold Investment
The data above indicates that the value of gold has the potential to grow over the long term with periods of short term fluctuations.
Gold vs Mutual fund Vs Digital Gold: How Should You Pick?
The data mentioned below suggests that gold tends to underperform when compared to mutual funds. Similarly, it carries storage and security concerns that are typically not found with alternatives like digital gold.
Expense ratio: 0-2.25%
ELSS MFs: Up to 1,50,000 under section 80c
Minimum investment amount
However, India rules the roost when it comes to the total gold owned by retail investors. Indian citizens own approximately 25,000 tonnes that's worth between ₹100 to ₹110 lakh crores.
Physical gold has its benefits and can be a potential long term investment. It can be used to hedge against inflation and to get an easy loan. Furthermore, it is a prized possession that's valued by a large majority of Indian citizens. The question comes back to identifying two aspects, first and foremost:
Why do you want to invest in gold?
Can gold add value to your investment portfolio?
It also pays to be aware of the limitations of the shiny yellow metal. Physical gold is a finite commodity that carries a certain amount of risk like theft, storage, making charges, and more. Mutual funds, digital gold, and gold ETFs carry none of these risks.
So the answer to this question lies in whether you value gold as an asset that you’d like to touch, feel and see or something that you just want to invest in for profits over the long term.
Facts & figures are true as of 20-10-2021. All information mentioned is for educational purposes and relies on publicly available information. None of the information shared here is to be construed as investment advice. We strongly recommend you consult a Cube Wealth coach before investing your money in any stock, mutual fund. PMS or alternative asset.
Curious about personal finance and all things money. Can either find me reading a book or dancing to a tune.
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