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65% of Indians invest in gold in one form or the other. Are you one among them? If yes, then think about what made you take the decision, is it because of your own free will or because of the societal and social construct that made you think that gold is a reliable form of investment? If the answer is the latter, then why are we so obsessed with investing in Gold? Does it yield the profit that is widely believed to be? Is the popularity of Gold killing all other investment options like how cricket is killing our other sports?
Come, let’s find out the answers!
Table of Contents
1.) Traditional Investments vs. Modern Investments
2.) Are Modern Investments Safe?
3.) Gold Investment: Truth Vs Fiction
4.) Gold vs Mutual Fund
5.) How Much to Invest in Gold?
6.) How To Invest in Gold?
7.) Conclusion
1.) Traditional Investments vs. Modern Investments
Do we have more faith in traditional investments such as Gold and real estate than in modern investments such as Mutual Funds and stock market investments?
According to the data on Indian household assets released by RBI in March 2023, 50.7% of Indians have invested in real estate and 15.5% in Gold. At the same time, the allocation for the stock market is only 4.7%.
Why do we allocate more to Gold and real estate investments only? The mental programming that “investing in Gold and land has always been very safe” is instilled strongly in our minds. It is good to evaluate this thought once before blindly trusting it.
2.) Are Modern Investments Safe?
We should not think that modern investments started only a few years ago. The first Mutual Fund company, UTI, was started in 1963. The first private Mutual Fund was started in 1993. The stock market regulator SEBI (Securities and Exchange Board of India) was started in 1988.
There is no separate regulator for investments such as Chit Funds and cryptocurrencies. Compared to them, stock market investments and Mutual Fund investments are legally safer.
Like Chit Funds, Mutual Fund operators cannot run away with the money invested by you. SEBI has defined strong rules that prevent this from happening. There are many sub-divisions such as sponsors, trustees, asset management companies, custodians, and registrars within a Mutual Fund. SEBI protects the interests of investors by imposing stringent regulatory rules in all divisions.
Even today, allocation charges are levied as entry fees in ULIP. But in 2009, SEBI abolished and banned entry loads for Mutual Funds. SEBI has taken a lot of such security measures to keep Mutual Funds as an investment option compatible with investors.
3.)Gold Investment: Truth Vs Fiction
Is the price of Gold always rising?
Does it not face a decline like the stock market?
The stock market has been flat for a few years without giving any return. Has Gold also been flat for a few years without giving any return?
The statistics you are about to see are not only the answer to these questions, but they will also make you understand to what extent the trust we have in Gold is a blind trust.
In 2012, the price of 1 gram of 24-carat Gold was ₹3105. It gradually declined to ₹2634 in 2015. Gold was able to touch the previous 2012 price of ₹3100 only in 2018!
From 2012 to 2015, Gold had a decline of -15%. It is also noteworthy that it has not given any return for six years from 2012 to 2018.
The price of Gold is also subject to fluctuations. There is a possibility that Gold may not give returns for up to six years. Therefore, Gold should not be included in the list of safe investments such as fixed deposits.
4.) Gold vs Mutual Fund
Even though fluctuations are a common thing for both Gold and the stock market, let us now see how much difference there is in the returns.
If you invest ₹10,000 every month in Gold from 1-1-2009 to 2023 December, what will be the value of the investment after 15 years?
The value of the total investment of ₹18 lakhs made for 15 years will be ₹39.37 lakhs. This is a growth rate of 9.77%.
9.77% is a relatively reasonable return. But you need to think if it is a return that is worth the risk of taking price fluctuations.
Do you know what return would have been received if the same investment had been made in Nifty for 15 years?
If you had invested ₹10,000 every month in Nifty from 2009 to 2023, it would have earned an annual return of 13.98%.
The value of the capital of ₹18 lakhs would have increased to ₹52.61 lakhs. It would have earned ₹13 lakh more than Gold.
If the Nifty index has given so much additional return, what return would an active equity Mutual Fund have given?
If you had invested ₹10,000 SIP in HDFC Flexi Cap Mutual Fund for 15 years during the 2009-2023 period, the investment amount of ₹18 lakhs would have grown to ₹69.85 lakhs. It would have earned an annual return of 16.43%. It would have earned ₹30 lakh more than investing in Gold.
It is now clear which gives a better return for taking the risk of fluctuations, Gold, the stock market index, or a Mutual Fund.
5.) How Much to Invest in Gold?
Based on the above statistics, you understand that Gold is not a bad investment, but it is not suitable for investing a large amount to achieve financial goals and generate enough returns.
So why should we invest in Gold? In the long term, the most suitable investment for asset accumulation is the stock market and Mutual Funds. The fluctuation of the stock market and the fluctuation of Gold prices are negatively correlated.
Often when the stock market sees a major decline, the price of Gold rises rapidly. At the same time, when the stock market rises rapidly, the price of Gold remains flat or declines.
The fact that the price of Gold rose significantly during the stock market crashes in 2008 and 2020 is evidence of this. Due to the negative correlation in this return, if Gold is also in your portfolio, it will increase the stability of your portfolio.
When the stock market falls, the value of your portfolio decreases. If Gold is also in your portfolio, the price increase of Gold will prevent the value of your portfolio from decreasing too much.
For these reasons, you can invest 5% to 10% of your total portfolio value in Gold.
6.) How To Invest in Gold?
i.) Gold coins sold by banks:
Banks sell 24-carat coins. They charge 8-10% more than the market price for it. They say reasons such as high-quality purity, imported from Switzerland, and AASAY certificate. Do all these things need it? Is it not enough if it is Hallmarked?
This additional price will not give you additional value when you sell Gold. We can only convert this Gold coin from banks into jewelry at a jewelry store. Banks do not buy it back from us. What is the benefit of the additional purity certificate given by banks then?
It is a practice at jewelry stores to buy back from us at a lower price than the current 24-carat Gold price. They only buy 22 carats at market price. Banks do not sell 22-carat Gold coins.
ii.) Gold coins sold by jewelry stores:
Gold coins sold by jewelry stores cannot be easily sold for cash. It is easier to convert them into jewelry. If they cannot be converted into cash, can we consider it as an investment? Even if you find a jewelry dealer who will give you money in return for Gold coins, he will only give you money after deducting a small amount from the market price. This is also a loss to us.
iii.) Sovereign Gold Bond (SGB):
SGB bonds have an 8-year lock-in period. The minimum investment amount is one gram of Gold equivalent to a bond. SGB bonds earn us two types of income. The first is the income earned due to the rise in the price of Gold. The second income is the additional 2.50% interest per annum.
These bonds can only be purchased on the specific date on which RBI releases them. The money will be returned when the 8-year lock-in period ends. This bond cannot be extended or renewed after 8 years.
If you want to invest a lump sum, if an 8-year lock-in is sufficient and appropriate for your investment period, you can invest in SGB bonds.
iv.) Gold ETF:
A Demat account is required to invest in Gold ETF. Gold ETF cannot be bought based on its NAV. It can be bought and sold at the price traded in the stock market.
When buying, you have to pay more than NAV. When selling, you have to sell at a lower price than NAV.
This price difference is generally between 0.03% and 0.08%. This price difference will be a loss to us when buying Gold ETF.
v.) Gold ETF Fund of Funds:
This fund does not require a demat account. These funds invest completely in Gold ETFs.
The expense ratio will be higher when buying this Gold ETF FOF. Therefore, investors should avoid it.
vi.) Gold Funds:
Gold funds invest directly in physical Gold. Its expense ratio is very low. You do not need a demat account to invest in it.
This Gold fund is very suitable for people who are unable to invest in SGB bonds. In this, you can invest whenever you want, unlike SGB. You can also invest in the SIP method every month. There is no lock-in period. There is no maturity date. You can invest for as many years as you need. You can withdraw part of the amount or the entire amount when needed.
“In reality, Gold is not a sparkling investment as we think. At the same time, it is not a bad investment either. The price of Gold is also subject to volatility risk. The price of Gold may not even rise for a few years.”
7.)Conclusion
In the long term, investing in the stock market and equity Mutual Funds is better than Gold. It gives additional profit. We must firmly register this in our minds.
If you still want to invest in Gold, under no circumstances should you invest in Gold coins sold by banks. It is wise to choose SGB or Gold funds to invest in Gold.
Let us invest in Gold only in the right amount and in the right way and avoid ignoring modern investments.
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