Gold is an important asset class, don’t miss it in your portfolio

Last few decades or as we may call it, the past century has seen a drastic development in world economy and finance. Launching of equity market, ever improving banking systems, bond markets, insurance, mortgages followed by derivatives, mutual funds, currency markets has brought in a complete new era in the way world economics function.

Through these diversification the investors has got many high yielding and super high yielding instruments to invest. Especially the mutual funds concepts of SIP, SWP, power of compounding has investors lured in one direction. That is high yield, higher yield and higher yields, every investor seems busy calculating how soon their SIP will make them “Crorepati”. By virtue of it, undoubtedly it is hand a down best product in the market to create long term wealth. But we need to continuously reiterate ourselves that financial planning is not only about money minting.
A health financial portfolio is proportionately diversified keeping in mind about the life goals and addressing emergencies. A portion of portfolio should be allocated for wealth creation, some portion for insuring against unforseen emergencies, some for socio-political emergencies. The personal emergencies could be covered by insurance, like medical, natural calamities etc. But we need understand that there are certain emergencies which doesn’t come up in general discussion. 
The emergencies like sovereign debt crisis, bank failures, inflation, deflation, depressions, a war. If we go back to history pages in gold, we will find that in these kind of emergency situation “gold” has often enjoyed a status of being reliable.
5 reasons we must hold gold.
1. It gives a hedge against inflation
2. In many economic cycles, gold gives better return than equities in short term
3. It is relatively independent class compared to other instruments
4. It is considered a reliable asset class, can be used for loan 
5. Adding gold helps diversifying your portfolio, hence reducing risk
Read more on gold investments – 
http://www.mymoneystreets.com/2016/08/soverign-gold-bonds-or-gold-etf-which.html?m=1
10-15% investment in gold is ideal for an individual investor. Do check with your financial advisor before investing.

Sovereign Gold Bonds or GOLD ETF. Which one is your cake?

  •      GOLD ETF thrives on high liquidity, can be converted into physical on 1 kg of gold, NRIs can invest too
  •        SGB offers interest on investment and capital gain tax exempted on redemption

Gold has been one of the oldest currency/ investment instrument world-wide. It is used widely as currency hedge, hedge against #inflation, and safe heven during various economic or political crisis. In India #Gold has a very special place. It is a popular investment choice among Indian households. However, the mode of investment is Jewellery and it is an emotional choice on rather than a well thought out investment choice, it is mostly bought as a wedding gift for the bride as “Stri Dhan” as it is referred.
There are many theories on the ideal exposure on this asset class, but no-one can deny that a portion of wealth should be kept in Gold, may vary from 10-20% of total portfolio, as its price tends to increase with the rise in the cost of living.
Jewellery, coins and bars – Asset with emotions attached
Though the asset class is important, investing in this has been a high-cost and difficult one. In Jewellery and gold bars, there many concerns like safety and storage, purity concerns and difficulty in trading. It also attract high taxation. It comes at a premium adding making charges in the range of 8 -25%, it my further vary depending on the seller.
GOLD ETF – Buy any day/ sell any day/ keep as long as you want
Last decade has seen a gradual but major shift in investors’ taste, with Mutual Fund companies offering GOLD ETFs and Gold FoF (Fund of Funds). GOLD ETFs are nothing but open-ended funds that trade on a stock exchange just like equity shares. Gold ETFs can be bought anytime like equity shares, can be bought anytime with minimum investment of 1 unit. Gold FOFs are predominantly used for SIP facility (monthly recurring investment) investing in Gold ETFs to accumulate Gold over a period of time. This is stored in dematerialised format, so no fear of theft or storage concerns. Though it comes under long term/short term taxation depending on the investment horizon, it doesn’t have any wealth tax attached. This is the most liquid form of Gold investment.  

NRIs can Invest in Gold ETF through trough exchanges with registered PINS account.
Gold Sovereign Bonds – Only form which pays interest
There is a new entrant in the market for investing in Gold, Sovereign Gold Bonds. Introduced in H2, 2015, bonds are issued by RBI in tranches on behalf of Government of India.
Sovereign Gold Bond Scheme, is an alternative instrument for holding Gold. Investors can simply apply through designated Banks/ PO/ NBFC and NSE brokers for investing in the SGB scheme in Paper/ Demat format. n a paper form through Sovereign Gold Bond Scheme. The under-lying asset for these bonds is Gold. These bonds will track the price of gold. The bonds also offer 2.75% interest income on the initial investment amount paid semi-annually to the investors. Minimum investment amount is equivalent to 1 gm of physical gold. 
The minimum tenor of the bonds are 8 years however, there is exit options  in 5th, 6th and 7thyear and it has a fixed tenor. The bonds are tradable in stock exchanges for those who holds the bonds in demat format. It doesn’t attract any capital gain taxes on redemption, however, interest pay out and early exit attract taxes as per long term/ short term gains.
Though the investment format is good, liquidity is low with exit option after 5 years with fixed tenor for maturity and the liquidity on exchange transaction remains to be seen.
So far in One year, Government of India has mobilised investment worth 2,292 crore Rs in four tranches in series I. Data shows no. of applications for the fourth tranche increased to 1.95 lakh from 62,169 in the first tranche. Despite these advantages, investors must note that liquidity in secondary market for sovereign gold bonds is yet to be seen.

The table intends to illustrate various aspects on the investment instruments.


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