- Gold has historically served as a good hedge against inflation.
- There’s no need to hold physical gold to get exposure to this asset class.
- Indians can take advantage of foreign direct investment to purchase gold or silver-related assets in the U.S.
- Stocks, funds, and ETFs provide convenient commodity investment alternatives.
Gold has historically been a strong hedge against inflation and has on some occasions outperformed both stocks and bonds.1 Indians looking to build wealth may wish to add some gold to their portfolios to take advantage of its relative stability and long demand history. While many people do purchase gold bullion, other options exist for those who wish to buy gold without worrying about storing it.
OscarDominguez / ShutterstockWhy Invest in Gold?
Gold is a precious metal that has been seen as highly desirable throughout history. The metal is used in the production of jewelry and decorative items, and many people seek it for its utility in the medical and dental industries, as well as for manufacturing electronics. This utility means people see gold as a reliable asset unlikely to simply “go out of fashion.” Even in an economic downturn, there should still be demand for gold.
The Pros and Cons of Physical Gold
Investing in gold bullion or coins is the most obvious way of acquiring ring gold. However, this requires a place to store the commodity. While some people do keep gold at home in a safe, many outsource the storage of their gold to companies with better security. This requires paying a fee for the storage and also means the gold is relatively illiquid since it takes time to find a buyer should you wish to dispose of your assets.
Gold Investment Opportunities Abroad
In addition to purchasing physical gold, Indian investors have other options for acquiring commodities. Many opt to invest in funds in the United States denominated in dollars, exposing them to the international markets as well as to the underlying asset. There are several options for Indian investors, including ETFs, mutual funds and investments in companies that either mine gold or otherwise have exposure to it. Some commodity funds offer the option to invest in other precious metals, such as silver, too.
1. Gold ETFs
Gold ETFs are exchange-traded funds that track the underlying asset. They offer a more liquid way of getting exposure to a commodity. The iShares Gold Trust is a popular gold ETF open to Indian investors. This ETF tracks the market quite accurately; however, there is a management fee. Investors looking to allocate only a small portion of their portfolio to gold will likely find this fee is worthwhile compared to the fees for holding physical gold.2
2. Gold Funds in the U.S.
Gold funds offer an interesting option for those who have relatively little capital. These funds are similar to ETFs, but they have lower minimum investment requirements. Many funds aimed at Indians accept investments of as little as 1,000 Rs. Gold funds are usually reasonably liquid, making it easy to move in and out of the investment as required. However, it’s important to remember gold is usually seen as a long-term investment product and inflation hedge, rather than something for short- or medium-term wealth building.
3. Gold Mutual Funds
There are several gold mutual funds to choose from, including the ICICI Prudential Regular Gold Savings Fund and the SBI gold fund. Because these funds all track the same underlying asset, the main differentiating factors are fees and minimum investments. When choosing a fund, consider the number of trades you’re likely to make each year and the timeline under which you will likely withdraw the investment, so you find the investment option that offers the best value for money for your use case.3
4. Stocks in Gold Companies
As well as investing in gold itself, Indians can invest in mining companies and others that have exposure to gold. Indians aren’t limited to the Sensex and NIFTY 50. The NASDAQ, Dow Jones and S&P 500 all welcome Indian investors, too, and the Liberalized Remittance Scheme, which came into effect in 2004, relaxed the rules for foreign investment. The scheme makes it relatively easy for individual investors to send money abroad to get involved with those international markets.4
5. Gold Investment Companies
Companies such as Deccan Gold offer another way for Indians to get exposure to gold without having to purchase physical gold. There’s some volatility to consider when investing this way because it exposes investors not only to the volatility of gold prices but to that of the company and general market conditions too. However, it may be possible to add gold investment companies to an existing regular share purchasing plan for a little extra diversification.
6. Gold-Backed Assets
Gold-backed assets such as digital gold or cryptocurrencies backed by gold are becoming increasingly popular. However, Indians who are considering investing in cryptocurrencies should think carefully about the risks involved in this market. Cryptocurrencies may use many of the same terms and jargon as the traditional markets, but they are not regulated in the same way. There are no guarantees that a cryptocurrency or token is backed by the assets that it claims to be, and there are no financial protections covering retail investors in the event of an exchange failure or hack. Those considering investing in cryptocurrencies should do due diligence on the asset and the exchange they plan to trade through.5
Silver and Other Precious Metals
Gold is not the only precious metal available to would-be investors. Silver and palladium are also popular long-term investments. Those who are considering investing in commodities in general may wish to spread their funds across a few different commodities. Just as there are gold-backed ETFs, there are also other precious metals ETFs that cover multiple types of assets. These make it easy for investors to diversify without having to find different brokers offering suitably high-grade metals.6
Gold Is Not a Productive Asset
Gold and other precious metals are not productive assets. They don’t generate revenue themselves or pay dividends. This means they won’t give income to the investor over time. Instead, they’re intended for you to hold them long-term in the hopes their value will increase at least enough to offset inflation. For this reason, gold is not usually the main asset in a person’s portfolio, but just a small percentage of the portfolio alongside dividend-producing shares, bonds, and perhaps even real estate.
Diversify Your Portfolio
Indians hoping to build their wealth should seek financial advice to help them build a diverse portfolio matching their investment horizon, income, and long-term goals. The closer a person is to retirement or a major purchase such as buying their first home, the more cautious their investments may be.
Those investing with a longer time horizon can take more risks and put a greater portion of their allocation in volatile assets offering higher potential returns. It’s common for investors to shift their assets toward bonds or stable commodities in the last few years before they plan to draw them out. This way, they can lock in their value and protect themselves against market fluctuations.
