Unless it is necessary, gold should be 5-10% of portfolio

If you want a conservative portfolio, you should consider debt instruments.
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First Published: Mon, Feb 04 2013. 09 14 PM IST
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Updated: Mon, Feb 04 2013. 09 17 PM IST
I am 26 years old and my monthly salary is Rs.28,000. I want to invest in gold exchange-traded funds (ETFs). Should I invest every month or should I invest a lump sum? Is there any difference in the returns of these two products? I am not looking at this investment to save taxes as I already have two life insurance policies.
—Swaroop
Investing in gold ETFs is the right way to invest in gold. As far as choosing between a systematic investment plan (SIP) and lump sum, SIP is better. While SIP does not assure you any returns, it does offer you the benefit of rupee-cost averaging as they purchase units over a period of time; you automatically buy more units when prices are low and fewer units when prices are high, resulting in lower per unit acquiring cost as a result of averaging.
Generally, the average unit cost under SIP is less than the purchase price per unit, irrespective of the market rising, falling or fluctuating. This typically holds true over a long period of investment. Hence, a long-term horizon is recommended.
However, rupee cost averaging does not guarantee a profit and at certain times lump sum investment may give you a better return. But with a sensible and long-term investment approach, rupee cost averaging can smoothen out market volatility and reduce the risks. Besides disciplined investing, it will also avoid tempting you to spend your money.
Since you have regular income in the form of a salary, the question of a lump sum will arise only if you keep money with you and then invest every quarter or half yearly which does not appear logical.
At the same time, you should look at investments beyond gold. Unless there is a compelling reason, you should not have more than 5-10% of your overall portfolio allocated to gold. If you don’t want to take any risk and want the portfolio to be conservative, you should look at debt instruments. Bank fixed deposits are a good option and currently with high interest rates and low or nil marginal rate of tax being applicable for you, you can start a recurring deposit. Public Provident Fund, which is one of the few tax-free investment options available, can also be considered.
The only other asset class in your portfolio is life insurance, which you may not need currently. What you need now is to build a corpus as this is the age with less or no responsibility and when you can save the maximum and use the power of compounding to your advantage.
Queries and views at mintmoney@livemint.com
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First Published: Mon, Feb 04 2013. 09 14 PM IST
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