Why gold needs to comprise 5-10% of your investment portfolio?

Allocate 5%–10% of your portfolio to gold as a hedge against other investments.

Why gold needs to comprise 5-10% of your investment portfolio

Gold has historically been valued as currency as well as a sign of wealth and prosperity. Even though gold is no longer at the forefront of transactions today, it still plays a vital role in the global economy. In recent times, pandemic-induced uncertainties and volatility across traditional investment options have pushed the price of gold to record highs. But despite the high valuations, investors should consider investing in gold for a well-rounded portfolio.

Why is gold a good investment option? 

The returns on gold as in investment have been consistent over the long term. Over the last 10 years, the price of 10 grams (or one ‘tola’) of 24k gold has skyrocketed from Rs 16,000 to Rs 54,000. In addition to lucrative returns, the objective of having gold in one’s portfolio is to diversify against investment risk, uncertainty, and inflation. 

Gold is one of the most effective diversifiers and has an inverse correlation to other asset classes such as equity, bonds, real estate, or currency. Whenever there is political or economic instability, the price of gold rises and acts as a financial sanctuary. Conversely, when other investments are performing well, the returns on gold tend to remain muted. In the short and medium term, gold’s value escalates in times of uncertainty, whereas the long-term prices are dependent on income growth.

Gold is considered as a ‘safe haven’ asset and its value transcends geographical boundaries and sovereign currencies. The investment can be easily liquidated against any currency, or bartered for a product or service if required.

Related: Gold ETFs vs Physical gold: Which one is better? 

How much gold should you have in your portfolio?

The allocation of gold in one’s portfolio would depend on a few factors. The income potential, investment plan, and overall portfolio diversification will determine what your exposure to gold should be. As a rule of the thumb, it is recommended to have 5%–10% of your total investment portfolio in gold. Those with a stable source of income and a regular investment plan can opt for a lower allocation as opposed to those whose income and investments are sporadic.

Similarly, if you have an array of investments in your portfolio that balance out overall risk, you need not allocate more than 2%–5% to gold. However, if your investments are (say) heavily leveraged towards stocks and mutual funds, you may want to consider diversifying with a higher allocation.

Even though gold investment returns in India has averaged about 33% over the last decade, it is not recommended to exceed a 10% allocation in gold. The returns may not sustain and you could find better, less volatile investment opportunities to deploy your funds.

Related: Is gold a safe investment avenue in bleak times like these? 

How to invest in gold?

With the advancements in financial technology, you don’t need to hold on to physical gold any more. You can invest in gold online in a much safer and convenient way. Here are some options to consider:

  • Gold exchange traded funds: Gold ETFs allow you to invest in gold and its allied businesses such as mining, manufacturing, etc. The minimum purchase unit is one gram (of 99.5% purity) and these are held electronically in a demat account. Each unit is backed by physical gold and if required you can even take delivery of it. There are 13 financial institutions offering gold ETF in India. 
  • Gold mutual funds: These invest in gold ETF, gold, and other liquid funds. Here, the investment value is denominated in rupee terms and the minimum investment value is one rupee. Unlike a gold ETF, you do not need a demat account to invest in a gold mutual fund. The low investment threshold, convenience, and opportunity for setting up a systematic gold investment plan make this a preferred mode for most investors. However, physical delivery is not possible with a gold mutual fund.
  • Sovereign gold bonds: Sovereign Gold Bonds or SGBs are issued by the Reserve Bank of India (RBI). The subscription is periodically available through banks, posts offices, and the stock exchange. Similar to an ETF, the subscription value of the gold bond investment is available in multiples of one gram of gold, with the maximum investment capped at 4000 grams in a financial year. In addition to price appreciation, your gold bond investment also earns interest at 2.5% accrued semi-annually.

Related: Gold price is surging, here’s why

Things to keep in mind when adding gold to your portfolio

You need to have a minimum horizon of 3–5 years if investing in gold as a tactical strategy to diversify risk. Use a combination of different platforms to manage investment tenure and returns. It is wise to stagger your investments via Systematic Investment Plans (SIPs) to average out the purchase cost.

It is important to note that while gold ETF and gold mutual funds are extremely liquid and can be traded at any time, SGBs have a tenure of eight years with an option to exit only after five years.

Before selecting a fund house, track its performance for at least the previous three years and total Asset Under Management (AUM) that denotes the reliability of the fund house. If investing in physical gold, ensure you have a Hallmark certification that authenticates the purity.

Remember that the percentage allocation of gold in your portfolio will change depending on the portfolio value. Review your portfolio and gold holding periodically to check if the asset allocation is maintained, and make changes accordingly. Read these 7 Benefits of investing in gold ETFs. 

Disclaimer: This article is intended for general information purposes only and should not be construed as insurance or investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.




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