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Photo: iStock
Photo: iStock

Will all the gold you are buying on Dhanteras fit into your portfolio?

  • Experts suggest you should limit gold exposure in your portfolio to only 7-10% even during volatile times
  • You can invest in gold to hedge against inflation, but even then, it should form only a fraction of your total portfolio

In India, festivals outnumber the days in a year. But there are some festivals that are celebrated with grandeur across the country. Dhanteras and Diwali are among two such festivals. While there are different mythologies and traditions associated with each festival, it is considered auspicious to buy gold, silver or other precious metals on the occasion of Dhanteras.

“There’s a huge spike in demand for metals during days like Dhanteras or Akshaya Tritiya as regular as well as seasonal buyers tend to make purchases. Gold and silver in forms of coins are the most preferred," said Sachin Kothari, director, Augmont, a metals management and online trading platform. Augmont has an annual turnover of over $1 billion and 40% of the sales happen during the festive season between October and November.

Emotional investment

Globally, gold is considered a safe haven in times of uncertainty, trade wars, tensions between nations, slowing economies and so on, but in India, buying gold is a traditional practice and even marks social status in some regions.

Gold is traditionally gifted and used during weddings and festivals, and it’s not always possible to eliminate traditions and emotions from all investments. “Traditionally, gold as an investment to be handed over to one’s daughter or daughter-in-law took the form of jewellery and ornaments. If that’s how the investment is intended to be used, this form is fine," Lovaii Navlakhi, managing director and chief executive officer, International Money Matters Pvt. Ltd, a financial planning firm.

“Some investments are emotional. Traditions are difficult to break and certainly financial calculations, even if they are adverse, will not deter investors," he added.

Too much is bad

While it may make sense to invest in gold for children and special occasions, once you think you have enough, it makes sense to stop. Remember that high exposure to physical assets like gold for investment purposes can do more harm than good.

You can consider investing in gold to hedge against inflation, but even in that scenario, the yellow metal should form only a fraction of your total portfolio. “Gold investments provide a hedge against uncertainty. We would recommend clients to hold approximately 3-5% of their net worth in gold, which can be increased to 7-10% during times of extreme uncertainty such as a global financial crisis," said Navlakhi.

Current scenario

Currently, gold prices have been on the higher side. “It may be noted that part of the returns can be attributed to the weakness in the Indian rupee against the US dollar," said Navlakhi. In the one year ended 23 October, gold has given a return about 16%.

The reverse is also true. Between September 2013 and December 2015, when the rupee strengthened by 5, returns on gold investment were sub-par (at -20%) , added Navlakhi.

Other experts agree. “Gold is not like traditional assets like equity or fixed income. Investments into these avenues provide periodic inflows by way of dividends and coupons. But you will not get such periodic incomes from gold. That makes gold less attractive from a pure investment perspective. That is precisely the reason why the share of gold or the allocation to gold in investment portfolios is never suggested beyond a 5% level," said Joseph Thomas, head-research, Emkay Wealth Management.

Investing in gold

If you wish to buy gold purely for investment purposes, consider gold exchange-traded funds (ETFs) or sovereign gold bonds (SGBs) over other forms.

Not that these two will provide higher returns than physical gold, but these two options significantly bring down the transaction cost, and SGBs provide an additional annual interest of 2.5%. Besides, when investing in ETFs or SGBs, you don’t need to worry about storage and security. These forms of gold can also be easily liquidated—partially or entirely.

Also, remember that returns from physical gold, gold ETFs, and gold mutual funds are taxable. Short-term capital gains (less than three years) are added to your gross total income and taxed at your slab rate, whereas long-term capital gains (over three years) are taxed at 20.8% (including cess) with indexation benefits.

In the case of SGBs, if you hold the investment till maturity, capital gains are exempt from tax. However, if you decide to redeem the bonds before maturity, returns will be taxed as per rules for physical gold.

So this Dhanteras, buy more gold only if you need to.

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