This Dhanteras, add some sparkle to your portfolio with gold

The word Dhanteras is an amalgamation of the Sanskrit words dhan, which stands for wealth, and teras which refers to the 13th day of the Hindu calendar, and the purchase of objects made of metal on this day is customary

It is that time of the year again when serpentine queues outside gold shops become a common sight. For Indian households, buying gold on Dhanteras – the first day of the festival of Diwali - is considered to be a harbinger of fortune and prosperity. The word Dhanteras is an amalgamation of the Sanskrit wordsdhan, which stands for wealth, andteraswhich refers to the 13th day of the Hindu calendar, and the purchase of objects made of metal on this day is customary.

For Indian households, buying gold on Dhanteras – the first day of the festival of Diwali - is considered to be a harbinger of fortune and prosperity.

Purchasing gold on this occasion of Diwali or Dussehra is a ritual wherein you are honoring a tradition while reaping financial benefits. Gold has a special place in Indian cultures and tradition – be it weddings, festivals, or childbirth, gold is sacrosanct in all celebrations. According to theWorld Gold Council, India and China are by far the largest gold markets and in terms of volume together account for over 50% of current gold demand.

The pursuit of gold as an investment is rooted in India’s post-independence history and the colouring it had on how older generations perceived wealth and financial security.

From an investment perspective too, gold has been a favoured avenue in India - more than 75% of Indian households own gold in some form or another, according toNational household surveyof gold consumption done by the India Gold Policy Centre (IGPC) at IIM Ahmedabad in association with People Research on India's Consumer Economy (Price). The middle-income group, or households earning ₹2-10 lakh a year, invests more in gold than the rich, accounting for about 56% of the annual gold intake of 800-850 tonnes, the report said.

Globally, gold is considered a safe haven in times of uncertainty, trade wars, tensions between nations, and slowing economies. The pursuit of gold as an investment is rooted in India’s post-independence history and the colouring it had on how older generations perceived wealth and financial security. Many of those who faced displacement and losses during that period would have seen first-hand that gold can be a safety net because of the value it holds as an international currency making it the most reliable asset during difficult situations.

Deepak Chhabria, CEO of Axiom Financial Services says, “Gold has always held tremendous appeal for Indian investors. The comfort in holding gold as an asset class is unparalleled and the attraction for gold has remained intact for centuries. This was largely due to the lack of availability of other investment options and low penetration of banking services. However, as the comfort quotient of investors with other asset classes increases, the role of gold is slowly evolving as a store of value.”

The importance of the addition of gold to one’s portfolio arises from the fact that generally, gold prices tend to have a low correlation with the movements of debt and equity. Equity and debt usually exhibit a curious pattern – during times of economic calm, equity and bond prices move in opposite directions but when the waters are choppy, equity and debt can take significant hits. Since gold has a low correlation to equity and bond prices, the presence of gold in your portfolio acts as a natural hedge.

Chhabria says, “Gold has a proven track record as a store of value, price of gold has kept pace with inflation, but in the long term, thus providing perfect and effective hedge. However, in the short term, the fluctuation can be unnerving. Adding gold to the portfolio brings in stability during times of crisis and reduces portfolio volatility - whenever there is geopolitical uncertainty, war, or any global event that affects markets, we see the price of gold moving up. Historically, Gold has had a low or even negative correlation to both stocks and bonds, suggesting it offers value as a tool of diversification."

Investing in gold

While buying gold coins, bars and jewellery is the most preferred method of investing in gold assets, there are other ways too to invest in gold that can be more convenient. Physical gold poses storage problems and liquidating them may be a challenge. Also, when selling gold jewellery, the making charges which can go up to 25% of the cost of gold and the GST levied cannot be recovered. If the gold items have sustained any damages, then the value can dip further during the reselling process.

Chhabria says, “Investors can buy physical gold or avail other options like gold ETFs and gold funds that are offered by many mutual funds. This form of investing is hassle-free, provides liquidity at the market price, and is also tax-efficient. Physical gold is more useful if the purpose is consumption in the form of gold jewellery.”

A gold ETFis an exchange-traded fundthat tracks the domestic physical gold price. A passive investment instrument, gold ETFs represent physical gold which may be in paper or dematerialized form.As perthe Association of Mutual Funds in India, one gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. Gold ETFs are traded on the National Stock Exchange of India Ltd (NSE) and the Bombay Stock Exchange Ltd. (BSE) like regular stocks. When you buy gold ETFs, you are buying gold in an electric form and the ETFs can be bought and sold in a manner similar to that of any company stocks.

Chhabria says, “Another avenue that investors can consider is the sovereign gold bonds scheme that is offered by the Government of India (GoI). These bonds are backed by GOI and denominated in grams of gold and are linked to the price of gold. With a tenure of 8 years and interest payment of 2.5% per annum, sovereign gold bonds can also be an option to consider when adding gold to one’s portfolio.”

Action points

• Should you choose to take the jewellery route, buy an insurance cover for your gold jewellery if you don’t have one already. A jewellery insurance cover secures the risk of damage or loss of jewellery due to theft, burglary, natural calamities, or other such situations.
• For long-term goals, like children’s marriage and education, you can add SIPs in gold funds to your investment mix as it will bring in an element of stability in the long run while beating inflation.

Disclaimer: This article is a part of an Investor education and awareness initiative of Aditya Birla Sun Life Mutual Fund.

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