First, gold has been hitting headlines because it has moved exactly opposite to the stock market. Market has lost 30 per cent in the last year and gold has gained that much. Your Rs 1 lakh in the market would be about Rs 70,000 today and in gold it would be Rs 1.37 lakh.
But beware, if you are thinking of switching totally to gold- don’t do that. We need to look at gold as an essential part of your portfolio. Speaking about splitting your money into two buckets - equity and debt, a third one can be added- it is smaller than the other two and it is called gold. And you need a dash of gold in your portfolio for 3 golden reasons.
So, WHY GOLD?
# Inflation hedge: Gold is a hedge against inflation. If stocks give good returns, debt products give predictable but low returns, gold's role is to protect your money against inflation or the continuous rise in prices year after year.
# Diversification: A good portfolio is one that has assets that don’t move up and down together. Gold does not move in tandem with either stocks or debt products. So we reduce the risk of a portfolio by adding gold to it. What this means is that by adding gold to your portfolio, at the same risk level, you get a higher return. A stock portfolio that had gold last year would have lost less than one which had no gold.
# Liquid emergency funds: Gold acts as emergency money. Imagine if you worked in Lehman Bros India and were looking at a 3-6 month period before you got another job. How would you pay your EMI and other expenses? The markets are down, to sell now would be to book huge losses. If you have gold in your portfolio, it is quick liquid money. You use it to tide over such emergencies.
However, the long term returns are not great.
It has just given 6.6 per cent return over the last 15 years, while stocks have returned 13 per cent. Its chief role is to protect what you can buy over time or your purchasing power. It keeps purchasing power intact.
Gold has been able to buy the same basket of goods and services over 400 years. What your great grandmother could buy with one gram of gold, you still can, we can’t say the same for 100 rupees can we?
How much gold?
# 5-10 per cent of your portfolio
# Aim is diversification
# Can increase this in inflationary times to full 10 per cent
WHAT TO BUY?
There are several forms in which you can buy gold in . While jewellery might be most tempting, we recommend that you buy gold in one form- Gold ETF's or Gold Exchange Traded Funds.
What are GOLD ETFs?
# These are funds that mimic gold prices closely; they are very much like your open ended mutual funds.
# Gold ETF funds take your money, buy physical gold and then break value into units (one unit of the fund equals one gram of gold)
# Units can be traded in stock exchanges, just like shares
# We believe these are ideal for retail investors like you and me
Why Gold ETFs?
# Cheaper to buy, hold and sell
# Safer, as you do not have to worry about storing it in a safe place
# Small units can be bought; minimum amount is just 1 unit, that is one gram. So if Gold is 15,000 rupees per tola, you can buy for as little as 1500 rupees a unit of Gold ETF.
# More liquid: you can buy and sell during market hours every day
# Tax advantage: Gold ETFs attract Long term capital gains. After one year, another form of physical gold gets that benefit only if held for 3 years.
COST OF HOLDING GOLD
There are three kinds of costs to look at when you buy a financial product. GOLD ETFs are better than bars or jewellery on all three counts. They are:
1. Buying cost: The maximum you will pay is 1.5-2.5 per cent as an entry ticket in a gold ETF; it can be as little as 40-60 basis points if you buy straight from a NSE broker. Bars cost 10-20 per cent of the price of gold , and jewellery has making charges of 15-20 per cent.
2. Maintenance cost: ETFs charge about 1 per cent each year; bars and jewellery will be the cost of insurance (Rs. 400-4,000) and bank locker (Rs. 400-4,000).
3. Selling cost: Brokerage of just 60 basis points to 1 per cent in the ETF. Exit is difficult from bars because banks don’t buy it back and so you lose the premium. For jewellery - again you lose upto 30 per cent when you go to sell.
So the clear evidence points towards putting GOLD ETFs in your portfolio and we have some good ones out there for you to buy.
GOLD ETFs IN THE MARKET
Scheme 1: Benchmark Gold BEES
# Returns for 6 months- 5.7 per cent
# Returns for 1 year- 37.1 per cent
Scheme 2: Kotak Gold ETF
# Returns for 6 months- 5.7 per cent
# Returns for 1 year - 37.1 per cent
Scheme 3: UTI Gold ETF
# Returns for 6 months- 5.7 per cent
# Returns for 1 year - 37.2 per cent
Scheme 4: Quantum Gold Fund
# Returns for 6 months- 5.8 per cent
# Returns for 1 year - Less than a year old
Scheme 5: Reliance Gold ETF
# Returns for 6 months- 5.1 per cent
# Returns for 1 year - Less than a year old