Gold has a special emotional place in India, but its financial role deserves a cooler look. Before allocating money, many people ask what is Gold ETF is and how it compares with other holdings. Once the answer is clear, the next concern is how to invest in gold ETF in a way that supports long-term goals rather than short-term hunches. This article focuses on portfolio thinking, helping you decide how much gold is enough and how it should work alongside your other investments.
Why Gold Earns a Place at All
You want to create a strong, balanced portfolio. Different types of assets will perform differently depending on the economic climate. Equities are usually long-term investments but can really fall in value during times of crisis. Fixed Income investments provide steady growth but can suffer from not beating inflation after tax. Gold has had a tendency to perform quite differently and often performs well during uncertain times and periods of currency instability.
However, as gold is measured against world benchmarks and then converted into rupees, a weaker currency will usually mean higher prices. While this does give gold a degree of protection against currency fluctuations, it can also remain stagnant or fall in value over long periods of time. This is why gold is seen as a good diversifier.
How much should I invest?
There is no set amount that everybody will follow. However, many financial planners will recommend investing around 5-15% of your overall investable portfolio. Again, this amount will depend on your age, goals and how comfortable you are with risk. If you’re younger and have many decades to invest for, you may want to put less money into gold and focus more on equities. However, if you’re getting close to retirement and like the idea of a steady investment, you may want to put more in.
Take into account what you currently have. If you’ve inherited jewellery or have built up a collection over the years, this is already an asset for you. You may not want to invest much more if ornaments make up a large portion of your overall net worth. However, if your family doesn’t have much physical gold, you may want to invest a larger amount into listed units.
Consider your goals. If you’re saving up for your daughters’ wedding in 10 years and gold will be an actual cost to you, you’ll want to have some of the same type of investment to partially protect against rising prices. However, if your goals are unrelated to gold (e.g. buying a house or paying for education) then keep the amount invested low and ensure you’re investing in the right assets for your goals.
Invest slowly
As with any investment, it’s very difficult to time the market perfectly. Instead, try to invest slowly. You can invest a set amount each month or invest in tranches a couple of times per year. This will help average out your costs and will reduce any feelings of regret when prices fluctuate.
Often during festive periods such as Dhanteras and Akshaya Tritiya people will invest at the same time. This can cause high demand and therefore high premiums for physical products. If you’re investing through the exchange then you won’t be affected by retail premiums however prices can still be affected by enthusiasm. By spreading your investments throughout the year you will reduce this.
When investing, use a limit order and ensure that the fund you’re investing in has decent levels of trade. Keep your contract notes and keep a simple log of when/how much/how much you paid. This will be useful when reviewing your portfolio and calculating taxes on sale.
Rebalance
Over time your portfolio will become unbalanced as one investment will outperform the others. If gold is performing well it may increase from 10% to 15% of your portfolio. To rebalance you will need to reduce the amount invested in the overperforming asset and increase the underperforming ones. This means you’ll have to sell some of the outperforming investment.
Try to rebalance once per year or if your investment goes outside of your desired range (maybe +/- 5%). Remember to consider taxes. Listed units held for longer than 12 months are taxed differently than those held for less. If possible, try to invest any new money into the underperforming asset to balance your portfolio without having to sell.
Expectations
As gold doesn’t give you any interest or dividends, your returns will only come from price movements. There have been years of strong growth and long periods of little growth. Don’t expect gold to outperform equities every year and don’t disregard it due to it being stagnant. Its value comes from how it performs when other assets are struggling.
Don’t get carried away with emotions. Don’t get discouraged if prices are booming and don’t panic if they fall. Let your investment do its job.
A balanced portfolio is like a strong family home. It has a strong base, a couple of strong pillars and some backup. Gold will be one of your pillars and will help you. It’s best to keep it to a sensible amount. If you know your goals, invest slowly and review once per year gold can be a great addition to your family for many seasons.
