The Hindu Business Line : Glittering, in parts

Avinash, 32, working in a software company, has had a windfall by way of bonus from his employer. Having invested much of his portfolio in shares, small-savings schemes and fixed deposits, Avinash thought that adding gold to his portfolio would make sense. He wonders how he should go about this. Does it pay to invest in gold jewellery? Should he buy those 99.999 per cent pure gold bars advertised by some banks?

Though adding gold to your investment portfolio may be a good idea from the diversification angle, investors need to be aware of the advantages and disadvantages.

On the positive side, gold is highly liquid and can be encashed anywhere, any time.

Gold is not influenced by factors relating to the Indian economy.

Since gold prices usually appreciate during periods of high inflation, it is one of the best instruments to hedge against price rise.

But on the flip side, gold has tended to deliver low investment returns over some time-frames and outperform over others, making timing important while investing.

Preserving gold in physical form brings with it the cost of storage (hiring a bank locker etc). Investing in ornamental gold entails a capital loss (sometimes up to 20-25 per cent) by way of wastage and making charges, while you sell it back to the jeweller.

Gold as an investment

Traditionally, gold has been held for its liquidity rather than for its attractive returns. An investment in gold 30 years ago would have, for instance, delivered a compounded annualised return of 9.1 per cent in the Indian context. Gold prices in 1975 hovered at Rs 54 per gm against the Rs 819 levels today. However, returns from gold have improved in recent times; they were 14.7 per cent over the past year.

Traditionally, gold has under-performed during periods of high returns from the equity market. However, an increasing inter-linkage between various forms of investments has had gold moving up in tandem with stocks, in recent years.

Experts suggest that investors allocate 5 per cent of their assets for gold for the purpose of diversification. If you plan to invest in gold, doing so through Gold Exchange Traded Funds (GETF), which a few mutual funds plan to launch, may be a good route.

Such vehicles would allow you to hold your position in dematerialised form.

Where to buy

If you have decided to buy physical gold, buying it from a bank or from a jeweller are the two obvious choices. Banks offer imported gold bars, which are hallmarked or certified for 99.999 per cent purity. Rates vary between banks based on the mark-up used by the bank vis-à-vis the import price.

However, the rates charged by banks are usually at a premium to those charged by jewellers for similar bars. ICICI Bank, for instance, now charges Rs 1,033 per gm on its pure gold, while leading retail jewellers in Chennai charge about Rs 887 per gm. For a 50 gm bar, a bank would currently levy Rs 52,180, inclusive of taxes, compared to the Rs 44,795 charged by a jewellery retailer.

Though it is more economical, the only risk of buying from a retailer is the purity aspect. However, restricting your purchases to a retailer of repute may help you reduce these risks. Go ahead and add a bit of glitter to your portfolio!

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