Tuesday, February 19, 2008

Gold Investment - A must in your Portfolio

"Compared to the digitized virtuality of financial instruments like shares, bonds and MFs, which are considered boring, investments like owning property or investing in art or gold have a certain panache," says Shyam Sunder, MD, PeakAlpha Investment Services. In the last three years, and especially in recent months, there has been a spurt in gold prices and gold has caught the fancy of investors.

In India, gold is mostly bought for social occasions like weddings and festivals and though it provides financial security, it isn't considered an investment tool. "In every portfolio, gold is a must as it brings an element of diversification. The price of gold is driven by factors that are quite different from the drivers of other assets such as stocks," says Anand KS of Nile Financial Planners.

Wealth managers feel that one should invest in gold based on the individual's risk/return profile. "Gold prices can fall in the short term, so you cannot rule out risk element. But since gold prices don't rise and fall at the same time as the stock market, it's worth including it in your portfolio," says Sunder.

However, it is important to identify the right reasons to buy gold. On the positive side, gold is regarded as a good hedge against inflation. It can be quickly converted into hard currency if required, it improves the consistency of your portfolio's performance during stable and unstable times and its pricing is not linked to the performance of the economy, industry or companies.

On the other hand, it doesn't provide regular current income like debentures, which pay interest, and doesn't offer any tax advantages. There's also a possibility of being cheated on the purity of the metal.

So, how much should you invest in gold and in what form? Wealth managers recommend gold investment in the range of 10%-15% of the total portfolio. Physical gold should be in the form of coins or bars. Gold Exchange Traded Funds, a relatively new concept in Indian MF industry, is another way to buy gold. Investors can trade like any other stock on the exchange, on a real-time basis. Gold ETFs mimic the price of gold. Liquidity is high as the units can be traded on the stock exchange.

Gold ETFs are the ideal way to save for the future as one can even buy gold in units of one gram (one unit of an ETF), and accumulate based on their capacity to save. These units can be sold when required and equivalent quantity of gold bought with the proceeds. Just as one does systematic investment in MFs, it can be done with gold too.

"Jewellery is not the best way to invest in gold, as one ends up losing on account of sales tax, making charges and wastages. Buying gold biscuits is a good option if you insist on having the metal in your custody," says T Srikanth Bhagavat, of Hexagon Capital Advisors.

Source : TOI