January 30 , 2013
Gold is one of the assets along with equities and real estate that are capable of growing your investments above the inflation rate in the long term. You cannot avoid being exposed to these asset classes if you hope to stay above inflation level in the long term, say ten to fifteen years down the line.
Real estate as an investment is beyond the reach of majority of common investors and structured financial products backed by real estate are yet to evolve fully in India. However there are well regulated financial products backed by gold.
A balanced investment portfolio would have 10-12% of its assets held in gold. Having too less or too much than that would make an unhealthy portfolio. Some believe that gold is always the best performing asset class and don't mind holding gold to the extent of 40-60% of their investment portfolio. But historical price movement of gold tells us that gold returns would stay just a little over inflation in the long term. Having more than 20% gold in your portfolio can be devastating. There are reasons why.
Unlike other metals gold does not have much intrinsic value. Gold is an unproductive asset. It does not pay you dividends or interest. Its value tends to peak during times of economic anxiety and cools thereafter.
Much of its value is accountable to its colour since more than half of gold's demand worldwide comes from jewelry! Secondly investment in too much is not favourable for India's economy because most of our gold requirements are met through imports.
Don't go overboard with gold, just stick to having about 10% of your overall investments in gold. If you happen to own more trim it to 15% levels.
Thinking about gold investment the first thing to come to mind is whether gold is overpriced at the moment and whether we should wait for prices to cool down. Historically gold prices have always had an upward trajectory so gold price tumbling is not much of a worry. Temporary corrections might occur, especially in the Indian context this is likely, owing to seasonal surge in demand; but in the long run you cannot lose with gold.
So instead of waiting and watching for a good price we advise you to create a disciplined approach to buy small and fixed quantities of gold in regular periods. This can be neatly achieved through gold mutual funds and you can start with as little as Rs 100 every month. Or you can go the gold ETF way, if you have a demat account, and be better off since charges are lesser.