It has historically delivered positive long-term returns and has also done a good job of improving the risk-adjusted-performance of the portfolio.
In addition, it is also considered a good hedge against inflation, systemic risk and currency depreciation. From a portfolio perspective, gold can add value in two major ways:
Increase long term returns
Gold has always appealed to investors as a safe haven because it provides a level of certainty to a portfolio during periods of uncertainty resulting from economic, political, or any other type of turmoil.
The good thing about gold is that historically it has not only provided stability to the portfolio but also generated positive returns over the long term. It has been a resilient ally in good times and bad. Some of the factors that make gold a flexible asset include the fact that it has diverse sources of demand. Gold is considered as an investment, a reserve asset, an ornament and a technology component.
Due to this, the demand for gold has remained fairly stable over the years. In addition, gold is also highly liquid, carries no credit risk, and carries a commensurate premium. The long-term returns of gold have often been equal to or better than many of the asset classes it has invested in.
Portfolio diversification to reduce losses
Equity is considered a long-term vehicle for wealth creation and as such is an integral part of an individual investor’s portfolio. It is equally well known that the path to wealth creation is to build a diversified investment portfolio that is spread across multiple asset classes.
Bonds provide stability and downside protection while equities provide an impetus to portfolio returns over the long term. However, historically it has been observed that there have been periods of economic turmoil when almost all asset classes except gold have generated negative returns.
A classic example is the 2008 global financial crisis when almost all asset classes from stocks to hedge funds, real estate and most commodities went into freefall. However, gold prices remained stable amid this turmoil and, in fact, gave positive returns during the period December 2007 to February 2009. This proves the value of gold as a classic portfolio diversifier.
How to invest in gold?
As an Indian investor, you can choose to invest in gold through a variety of gold investment products. Among all the options available, the one that is the most liquid and stands out as a compelling investment option is Gold ETFs.
a gold etf is an exchange-traded fund (ETF) that aims to track the price of domestic physical gold. Buying gold ETFs means that an investor is buying gold in electronic form which is kept in a demat account. Each unit of a Gold ETF is backed by physical gold of high purity. You can buy and sell gold ETFs just like you would trade in stocks. Like any company stock, gold ETFs are listed and traded on stock exchanges and can be bought and sold continuously at market prices. Therefore, gold ETFs combine the flexibility of stock investing and the simplicity of gold investing.
Gold ETFs cost much less than investing in physical gold as there are no making charges. As a result, Gold ETFs are best used as a tool to benefit from the price of gold rather than getting access to physical gold i.e. investors can take advantage of it. Investment In gold without actually buying physical assets.
While investing through Gold ETFs, an investor has the option to invest at regular intervals through Systematic Investment Plans (SIPs) or opt for lump sum investments. During this, one need not worry about matters like purity of gold, storage hassle etc.
So, this Diwali, add a sparkle to your investment portfolio by opting to invest in Gold ETFs.
(The author is Head of Product Development and Strategy, ICICI Prudential AMC.)