GOLD AS AN INVESTMENT
It is well known that Indians are obsessed with Gold. The amount of Gold in Indian households is unparalleled. Indian obsession with gold has only grown stronger over time. India accounts for the majority of world gold consumption. Despite the fact that a large number of Indians live on a meager income, they find methods to purchase gold and make it a vital part of their life, regardless of the rate of gold.
Instead of viewing gold as an investment tool that we received from our parents or grandparents, Indians have a distinctive perspective on the precious metal. But over time, our perception of gold has evolved. Today, gold is viewed as an investment as well. It would be advantageous to diversify the portfolio using gold as an inflation hedge in a constantly shifting global economy. Certain events that reduce the value of stocks and bonds will cause the price of gold to increase. It helps to safeguard your cash from unfavorable stock market movements. You might invest for the long term by purchasing gold.
Gold acts as insurance in times of struggle or suffering, such as natural calamities, financial crises, economic crises, or political failures. Even in the absence of a dramatic event, a protracted slowdown or rise in inflation in the economy can spread to the financial markets and cause the local currency, bonds, and other assets to lose value. In such circumstances, gold's perceived value increases. There are three ways to buy gold. These three options include physical gold, exchange-traded funds, and sovereign gold bonds (SGBs).
Sovereign Gold Bonds (SGBs): SGBs are multiples of one gram of gold that are issued by the Reserve Bank of India (RBI) on behalf of the Government of India and traded on the open market. Despite the fact that these bondholders do not really own any gold, changes in the price of gold have an impact on the bond's value. It offers market returns that are correlated with the gold price. SGBs return the initial investment plus interest at a set rate of 2.50% annually. Interest is paid semi-annually. These bonds can also be used as loan collateral because they are backed by a government guarantee. SGBs are suited for investors with low liquidity needs and a long time horizon because of their five-year minimum holding period. An investor who has no need for liquidity for the next five years can buy SGBs. During this holding period, SGB holders are compensated with an additional 2.5% interest along with changes in a bond's value.
Open-ended mutual funds that invest in Gold ETF units are known as Gold ETFs. Changes in the price of gold have an impact on its market value. Like SGB, its returns are based on the gold market price. Mutual funds are called gold ETFs to follow domestic gold prices. ETFs assist eliminate the hassles of storage and fees when compared to physical gold. The distinction here is that on behalf of the investors, the ETF management holds physical gold in the government treasury. You must first open a trading - Demat account with any broker in order to invest in gold via an ETF. It is appropriate for investors that have strict liquidity needs and a limited time horizon. Gold ETFs are the best choice for investors who can't commit to holding for a long period of time due to current financial needs because they may be sold on the exchange at any time. The returns on Gold ETFs are much lower than the return on actual gold since the ETF administration charges fees for the services rendered.
The most direct way to access gold is through physical gold. Physical forms of gold are referred to as coins, jewelry, or bullion. Rather than its monetary face value, the value of physical gold is determined by its quantity and purity. They are available from jewelers. Having physical gold requires storage, which can be expensive if lockers are required. The best way to own gold is physical since it can be accessed quickly when needed. For long-term investors who want to purchase gold for gifts or use it as wedding jewelry. Physical gold is the best option. It is also appropriate for investors who want to speculate on gold prices; in these cases, bullion is preferable because it incurs fewer manufacturing costs. Yet, physical gold has its own disadvantages, such as the possibility of theft. It must therefore be kept in a bank locker, resulting in additional storage fees.
Conclusion Regardless of the results it produces, gold should be a part of every long-term portfolio. Even if there is no ideal allocation system, historically, there has been an incident that could have destroyed the economy or nation every ten years. As was previously stated, gold has a greater purpose in the overall portfolio as insurance than as an investment.
It is advised to devote the same amount of time to each of the three options if you haven't connected with any of the aforementioned three. Although physical gold is significant, SGB makes tax-free profits due to its illiquidity, whereas ETF is liquid and can change its gold holdings. Moreover, ETFs may be used in standard SIPs before being redeemed for consumption.
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