A combination strategy to invest in gold

There has been a lot of interest in gold ever since its prices spurted spectacularly over the Rs 50,000 mark. This invariably happens when the prices of any asset class rise rapidly. For example, when stock prices rise, investors rush to buy. But analysis will show the futility of such an approach. The classic way to make money in investments is to “buy cheap and sell dear”. But most do exactly the opposite. 

Since nobody can accurately predict when the prices are high or low, the best way to invest is through proper financial planning, based on your goals and risk profile. The best approach to invest in assets such as equity and gold where prices fluctuate a lot is to invest a fixed amount through a systematic investment plan (SIP) to take advantage of rupee cost averaging.

If we disregard any short-term movements and only look at the daily 10-year moving averages, there will be 2,728 observations on the 10-year return between June 30, 1999, and July 1, 2020. The returns are comparable — the average is 14.60 per cent a year for equity and 13.90 per cent for gold (equity returns from Nifty-50 total return index and gold returns from World Gold Council prices of gold in rupees). The minimum return for equity and gold is 5.1 per cent and 6.4 per cent, respectively. Similarly, the maximum return for equity is 22.40 per cent and 21.30 per cent for gold. Therefore, just like equity, any investment in gold should be made through the monthly SIP route and only up to the limits that are pre-planned by you. 

However, buying gold jewellery is not investing in gold. It loses 20-25 per cent (on account of making charges) as soon as you take it out of the showroom. Buying physical gold bars or gold coins has several hassles including purity concerns and safety and storage costs. 

The best way to invest in gold is to buy sovereign gold bonds (SGBs) that offer 2.50 per cent taxable interest a year. The capital gains, if any, are tax-free on maturity. The drawback, however, is that you cannot invest in SGBs through the convenient SIP route. For the SIP route, you have two options — a gold fund but it comes at a cost of 1 per cent (payment to the fund house) and digital gold of MMTC-PAMP bought through major electronic wallets such as GPay, Paytm or Phone Pe and some others. This option is meant for retail investors only with a limit of Rs 15,000 per month. Again, the cost of storage and insurance is built into the price. 

To combine the SIPs in a gold fund with SGBs, start a monthly SIP into a gold fund. From time to time, withdraw money from it and invest in new issues of SGBs. Bargain hunters can also use the redemption proceeds to buy the SGBs from the stock exchanges where it is available at a discount simply because of the restrictions inhibiting market making. Though theoretically a superior strategy, this option is not really for retail investors who do not have a broking account or ones who aren’t disciplined.
The writer is Sebi-registered investment advisor

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