Reserve Bank of India governor D Subbarao has gone all out to discourage gold investments as record imports of the yellow metal are adding pressure to the rupee.
Diehard equity fans criticize the absence of any intrinsic value in gold and its susceptibility to theft is a constant worry for its owners. After providing 25% annualized returns over the past five years, gold has depreciated 4% in recent months. Given this background does it make sense investing in gold?
According to experts, the answer is yes, but only by way of insurance against other asset classes falling apart. "It is our opinion that the recalcitrant inflation and moderate performance in equity and debt asset classes may prompt many retail investors towards gold as an asset class," says Lakshmi Iyer, head of product and fixed income, Kotak Mutual Fund.
She adds that the latent volatility in the forex market, and the possible monetary expansion in the primary currencies worldwide, may also boost the gold performance prospects. But it is a bad idea if you believe that gold can be an alternative to other assets such as equities and fixed income.
"As long as you are not looking for short-term gains, we have always held the view that investment in gold should be part of a well diversified portfolio," says Kapil Narang, chief operating officer Ameriprise
The record 30% rise in gold prices over the last year is precisely the reason why financial planners are recommending that investors do not make any big bets on the yellow metal.
"We have gone past that stage when gold could be recommended as a tactical investment. Now we would typically advise an investor to have 5% gold in their portfolio purely as a hedge against inflation as price of the metal moves in line with inflation," says Aditya Apte, partner at The Tipping Point, a financial advisory firm.
He adds that for those who have already chosen to have an asset allocation of say 10% of their portfolio in gold and now with the increase in prices the share of gold has gone up to 15%, they could look at selling some gold and increasing the share of those assets whose value has shrunk.
While this makes a case for continuing to invest in gold, the bad news for women is that they cannot look to buying gold jewellery and treating that as an investment. "The "making charges" in gold jewellery and the deductions during resale do not leave much scope for buying jewellery as investments," says Apte.
He adds that even if one were accumulating gold for a future requirement like marriage, it would make sense to buy the metal in electronic form through exchange traded funds, a form of dematerialized gold. "Even if gold were purchased in bullion form there is still a margin between the sale and repurchase price. The best option is to invest in ETFs and upon requirement the ETFs can be sold and the proceeds used to buy physical gold."
ETF as an investment has caught on very well with the number of accounts rising to 4,28,769 in September 2011 from 1,47,047 in March 2010, indicating a growth of almost 192%. Total amount of gold held by ETF AMC has gone up from 19 tonnes in March 2011 to 28 tonnes in September and 33 tonnes in December 2011, an increase of 74% in nine months.
Seeing the popularity of the gold ETF, the National Stock Exchange (NSE) has decided to have an extended trading session for gold exchange traded funds, after trading concludes in the cash and derivative segments at 3.30 pm, on Akshaya Tritiya April 24 (Tuesday).
While trading can be done on gold ETFs in the normal market hours from 9.15 am to 3.30 pm, trading in gold ETFs will resume at 4.30 pm on April 24 and will continue till 8 pm, to give an opportunity to investors to invest in the yellow metal till late in the evening. There will be no transaction charges for trading in gold ETFs on Tuesday.
Posts
