- Gold is a commodity used in health care, electronics, and other industries.
- Gold can be a valuable hedge against inflation.
- Returns on gold investment are typically lower than returns on stocks and shares.
- ETFs, IRAs, trusts, and shares can all offer indirect exposure to gold.
Gold is a precious metal that has been seen as valuable throughout history. It is widely regarded as both a store of value and a hedge against inflation, making it an appealing option for people who are looking to protect their wealth during periods of economic downturn. Investing in gold can be a good option for Indians who are looking to put together a wealth-building portfolio.
Why Invest in Gold?
Gold can be a good long-term investment option. It is volatile in the short term, but over more extended periods, it has historically proven to be a strong store of value and outperformed inflation. Gold is traditionally a safe haven, used to preserve wealth rather than something that could build wealth. Unlike shares, which often pay dividends, gold is not a productive asset. However, it is a commodity in demand for many reasons and has a proven track record of long-term value.
Gold as Part of a Diverse Portfolio
Because gold is not a productive asset, it tends to offer relatively modest returns but also relatively low risk. Between 1990 and 2020, gold increased in value by 360 percent. The Dow Jones Industrial Average increased by 991 percent in the same time period.1 Gold’s price performance is often inversely correlated with that of other assets. This means Indians who are looking to build their wealth may find it useful to have a small allocation of gold in their portfolio, along with domestic and international stocks and other assets.
Options for Investing in Gold
There are several ways Indians can invest in gold. Buying bullion directly is one option, but IRAs, ETFs, mutual funds, and trusts can also be good options. Another option is to buy shares in gold-related companies that are open to Indian investors. These could be gold investment companies or even mining companies. Investing in gold-backed assets in the USA gives Indians a way of diversifying their portfolio and getting a buffer against any potential domestic economic issues.
1. Gold IRAs
A Gold IRA is a retirement account that allows you to invest in gold bullion and coins. Traditional retirement accounts don’t allow this, and even Gold IRAs have strict requirements on the purity of the gold that can be purchased and how that gold is held. Gold IRAs aren’t restricted to holding just gold; they can also be used for certain other precious metals, such as palladium, as long as the assets meet the purity standards.
2. Gold ETFs
Gold ETFs are exchange-traded funds that track the gold market without requiring the investor to hold the underlying commodity and deal with issues such as storage fees. The Nippon India Gold BeES is an example of such an ETF.2 It closely tracks the returns of the gold markets after nominal expenses and can be a good option for those who don’t want to deal with the complexity of holding gold as a physical asset. It’s important to note that the ETF tracks the domestic price of gold rather than any international markets.
3. Gold Mutual Funds
Indian mutual funds are permitted to invest in gold. Several major mutual funds offer gold as an option, including the Axis Gold Fund3 and the Invesco India Gold Fund4. These funds are aimed at people who want exposure to gold as a part of a diverse portfolio but want more flexibility. They often have small deposit requirements, allowing people to get started with gold investing without having to risk a lot of their money. Mutual funds are relatively liquid compared to commodities as well, so it’s easier to sell them and withdraw for a major purchase.
4. Gold Bonds / Trusts
Sovereign Gold Bonds are a security issued by the Reserve Bank of India on behalf of the Indian government. These bonds are designed for long-term investment, maturing after eight years. Individual investors can sell their bonds early on the date of the fifth-, sixth-, or seventh-year’s interest payment. There’s a maximum investment limit of 4kg worth of gold for individual investors. Because these bonds are government-issued, they’re relatively low risk and can be a simple option for investors who are thinking long-term.5
5. Gold as a Commodity
Indians do have the option of purchasing physical bullion or gold coins. Some people do this and keep the asset in their home. However, this creates the risk of loss or theft and also means the asset is harder to sell in an emergency since it would require finding a buyer who can verify the authenticity of the gold. Some brokers will purchase and store gold for buyers for a fee. These companies also charge an annual fee for ongoing storage and will have minimum investment amounts too. It’s important to carefully research any companies selling physical gold to ensure the asset’s authenticity.
6. Companies with Exposure to Gold
Some companies with exposure to gold are open for Foreign Direct Investment (FDI). This includes gold investment companies and gold mining companies. In some ways, this kind of investing is riskier because it exposes the investor to broader stock market fluctuations as well as the fluctuation of the asset itself. However, it can also offer better returns and is more flexible. Many brokers allow fractional share purchases, so those who lack the capital to get involved in gold directly may benefit from this kind of investment option.6
Why Consider the U.S. Markets?
Choosing gold investment companies in the United States can offer Indian investors a chance to hedge against any potential downturn in their home country. The United States is a major economic power and diversifying by holding assets in India and the USA offers insulation from all but the most global of economic crises. There are some challenges with investing in foreign markets, and it’s important to seek advice to ensure any investments are tax efficient. However, for many investors, the benefits of having a geographically diverse portfolio make sense.
Gold vs. Stocks and Shares
Gold is not a productive asset. The value of gold is based partly on demand for its use in certain industries and partly on its historic perception as a store of value. This makes it distinct from shares that are productive assets because they represent the economic activity of a company. Many listed companies pay dividends, so shareholders have the opportunity to realize some returns without having to sell any of their holdings. This makes gold a popular choice for protecting existing wealth rather than building wealth.
Seek Advice When Planning Large Investments
Investing in gold or any other commodity requires some planning, especially if the investment involves moving money outside of India. Before investing abroad or choosing an ETF, mutual fund, or IRA, talk to a financial advisor to ensure the investment is tax-efficient and that it suits your goals. Someone investing with a long-term goal in mind may receive different advice than someone who expects to liquidate their assets in the next three to five years.
