I recently advised one of my clients to buy Gold for his investment portfolio.
He looked at me with surprise and said, “Who buys gold for investment? We have sufficient family jewelry and do not think we should be adding more gold. It is anyways a non-productive asset that is unlikely to contribute much to my portfolio earnings.”
So here is my conversation with the client about Gold as an investment option:
1. What are the historical returns provided by Gold?
Gold has usually given healthy returns. Don’t believe me? Here is the data of last 50 years –
Gold Prices in India (24 Karat, 10 Grams)
|Decade on Decade return (per annum)||21.9%||9.2%||3.2%||15.4%||10.7%|
|Returnswith 1970 as base (per annum)||21.9%||15.3%||11.2%||12.2%||11.9%|
2. But, still it is lower than the stock market return.Sensex has delivered 14.9% annual growth over last 40 years as compared to 9.6% delivered by Gold.
Yes, but when did we say that we should invest only in Gold and not in the stock market. Gold is another asset class, which must be utilizedto diversify the investment basket and reach an optimum asset allocation. We encourage our clients to have 10% to 15% of their total assets in Gold.
3. Hmm….what about storage? Isn’t it difficult to store physical gold? And, then it attracts full rate of taxation as compared to equity which only attracts 10% in the long term. You only taught me always consider tax while making investment.
Gold can also be bought in digital form so there is no problem of storage. If you invest through sovereign gold bonds, the investment is exempt from capital gains tax.
Here is a quick guide on various alternatives available for investment in gold via digital form along with their tax treatment:
|Criteria||Sovereign Gold Bonds||Gold ETF’s|
|Investment Horizon||Greater than 5 years as these have a lock in period of 8 years with periodic exit options after 5 years||Short Term / opportunistic exposures|
|Coupon Rate||2.5% per annum||There is no interest paid on Gold ETF’s|
|Taxation||If held for entire 8 years, exempt from Capital Gains Tax If exit is taken earlier than 8 years, long term capital gains tax is payable. Further, indexation benefit will also be available after 3 years of holding Interest is taxable at applicable slab rate||For exit before 3 years, Short term capital gains as per the applicable slab rates For holding above 3 years, Long term capital gains after indexation benefit|
|Holding Cost||None||Fund managers charge a nominal fee for managing ETF|
4. Ok…then it makes sense to invest in Gold as returns and interest of 2.5% makes it a compelling proposition. Is there any other feature or riskthat we have missed above?
Many people and governments across the world use Gold as an investment tool. It becomes particularly attractive during times of crisis as it is considered to be a safe heaven and hence used for risk mitigation. While theother asset classes like equities and real estate correct during crises, Gold typically gains and protects the free fall in portfolio value.
From a risk perspective, Gold derives much of its value as governments across the globe invest in it. If for some reason, governments start selling Gold, the prices may fall. Further, high prices may lower the consumption demand putting pressure on prices.
So, to conclude, Gold is an important asset class that should be part of each investment portfolio.
Attractive returns, reputation of being a safe heaven, global asset class are strong reasons to invest in it.