Should You Invest in Gold Today on Akshay Tritiya?

Today is Akshay Tritiya (or Akha Teej / Akshay Teej) – a day which is considered auspicious to donate to the needy or to present something to dear ones or to start a new trade/venture. It is also considered a good day for weddings. The savvy marketers of modern times have made this day auspicious solely for buying Gold. So you see hoarding, advertisements, surrogate advertisements and advisories extolling you to buy Gold today. For the believers and non-believers alike, the main question is – Is Gold a good buy as an investment? If yes, in what form should it be bought?

Gold as an Investment

Gold has a unique position as an investment. It thrives on economic volatility and chaos in the world – a throwback to the days of Gold Standard instead of the current Dollar Standard. That’s why, various financial crises – sub-prime crisis, dollar meltdown, Eurozone problems etc – in the recent past have seen Gold going through one of the most spectacular rallies ever. Consider the chart below:-

Last Akshay Tritiya Date	Price that day (Rs, 10 gms)	Annualised Returns till today
Today (24 Apr)	28803	31.48%
06 May 11	21906	24.91%
17 May 10	18548	24.61%
27 April 09	14885	24.67%
08 May 08	11922	-

As you can see, returns have been far better than what any other investment has given. But will it continue its dream run? May or may not. If the world’s economy stabilises, if no new crisis takes place, it may not. If world continues in a flux, it may continue to appreciate depending on how deep is the crisis. How do we see it today? We feel that the world is turbulent enough (and the crises are not going away anywhere too soon) for Gold to offer a good value for at least one more year. Nobody knows beyond that.

How to Buy Gold for Investment

Primarily Six ways in which you can invest in Gold:-

1.    Jewellery - Good for personal use but not good as an investment. Problems – difficult to be sure of purity (unless you pay huge charges for Hallmarking), coloured stones embedded in jewellery sold by Gold rate but rejected while selling back, storage and carriage problems, high making charges which are lost the moment you buy the jewellery piece, no standardisation of prices amongst jewellers and the Indian mindset of never selling Family Jewellery (thus it does not serve the purpose of an investment).

2.    Coins/Bars - Easy to buy but very expensive. Today’s 24-carat Gold rate (9.15 AM, 24 April 2012) in Mumbai Bullion market is Rs 28803 per 10 gms. Of the banks selling it, cheapest is SBI at Rs 30,519 (6% mark-up), PNB is giving at Rs 31,888 (10.7% mark-up) and ICICI Bank is giving at 33,447 (16% mark-up). An investment made at such high prices may take long time just to get even. Also, as per RBI rules, Banks are not allowed to buy back any Gold, not even their own coins. That way, ‘trusted jewellers’ are a better bet as they will most likely buy back what they have sold to you when you go back to them – but finding a ‘trusted jeweller’ is an exercise by itself.

3.    Gold ETF - Gold Exchange Traded Fund. Paper Gold - it is like your money in the bank. Most efficient way to buy and sell gold. Done on stock exchanges at the price of 24 carat Gold at that moment in the bullion market – no mark-up. No problems of purity, storage/carriage and no time lag in buying or selling. Can buy or sell from 1 gm equivalent onwards. Benefits of Long Term Capital Gains available after one year itself. Problems – you don’t get to hold it in your hand, cannot buy less than 1 gm and there is no procedure of ‘Systematic’ buying automatically on a regular basis.

4.    Gold Mutual Funds – Similar to Gold ETFs with all its advantages but taken through the Mutual Funds route. Additional advantages are – do not need a demat account, can buy on a regular basis (generally once a month), and investment could be from as low as Rs 100 per month or Rs 5000 in bulk with no upper limit. Disadvantage – generally 0.5% transaction charges additional to ETFs, but that does not amount to much anyway.

5.    E-Gold – Another form of paper Gold bought on NSEL (National Spot Exchange Limited). Need a separate demat account for it. Advantages same as Gold ETF. Additionally, transaction costs and liquidity is better provided you are buying it in large quantity. It can also be converted to physical Gold at additional cost. However, it makes sense only if you are going in for large quantity of Gold. For small quantities up to 50-100 gm, it may not be beneficial.

6.    Gold Futures – These are ‘Futures Contracts’ on Commodity Exchanges such as MCX and NCDEX. These are meant for sophisticated investors who understand the associated risks since these have the potential to make or lose big money. Meant for traders and speculators with a high risk appetite.

Our Recommendations

Gold is definitely investment-worthy even at current high rates but remember:-

1.    Gold ETFs / Gold Mutual Funds are the best way to buy Gold for investment.

2.    Since Gold prices are quite volatile, better to buy regularly in small lots. Gold Mutual Funds score over ETFs there.

3.    Never should Gold form more than 10% of your portfolio. If your total investments (excluding real estate) are, say Rs 10 Lakhs, Gold should be maximum Rs 1 Lakh. Similarly, if you contribute Rs 10,000 per month to savings, Gold should be Rs 1000 pm.

4.    Remember, despite its fabulous returns in the past few years, Gold, in the very long-term, tends to move just along with inflation rate. Hence, it is actually a hedge against inflation only. Do not go over-board by stocking up a major part of your savings into it. Do not forget the drastic fall it had in 1980!

How to align your Investments with your Personal Financial Goals

I have been invested in Equity mutual funds for the past one year and have barely made enough money in it even to pay your fees! I am worried – will I lose my money? If it is to continue like this, should I put my money only in Bank FDs – at least the interest rates are high for now and they are safer?

For the past few months, we have been getting such emails or telephone calls where people invested through us (or elsewhere) pose their dilemma. This clearly reflects the grief that almost everybody is experiencing with the state of stock markets today. Though the markets have run up quite well in the past 7 weeks, with some financial pundits pompously predicting that The Bull Run is Back, the volatility of this week has got the original question doing the rounds again.

While the question does indicate anxiety of investors, it also brings out the investors’ non-comprehension of correlation between one’s life-time goals and the various avenues available for investing. This further begets the question – how should one go about deciding how to invest his money, whether a lump-sum or monthly savings or both? This article will aim to sort out this basic issue.

The very first thing to understand is that if we do not know (or are unclear about) what we wish to save for, we will never be able to save for it!! It simply means that if we do not specifically save for life’s major financial goals, it will be very difficult to remain on track to do any meaningful investments. The temptation to dip into savings at the smallest pretext will be too much to resist, resulting in a scramble when those big-ticket expenses actually arrive. And what could be those financial goals – anything that consumes a lot of your money and is something which you have to or want to spend your money on. The goals could be children’s higher studies (graduation and post-graduation), their marriage, a comfortable retirement, regular domestic and/or international vacations, changing your car every 7-10 years, donating regularly for a charity etc. For example, if you know a particular saving avenue is to fund your daughter’s marriage, you would touch it for anything else only if you have your back to the wall.

The next thing that comes up is how to decide where to save the money? Primarily, money can be saved in four types of asset classes: Debt (eg, Provident Fund, Fixed Deposits, debt mutual funds, and Government schemes like NSC, Post Office schemes & Government bonds), Equity (direct stocks, equity mutual funds, ULIPs), Real Estate and bullion (precious commodities like Gold, Silver, Platinum and Palladium). Each asset class has its own peculiarity as below:-

Debt: Capital is protected but returns may just about match the inflation. A portfolio consisting of pure debt assets is not likely to be able to meet your long-term financial goals.

Equity: Investments in equity guarantee a roller-coaster ride in the short-term! Implying, one should understand that equity will have dismal returns and bumper returns at varying points of time. But carefully selected portfolio which is well-monitored can give returns far in excess of general inflation rate over a long period of time – generally beyond 3 years. Thus, equity is good for long-term but may be unsuitable for short-term goals.

It is said that you trade in ‘Debt’ while you invest in ‘Equity’, meaning that you should invest in debt-related instruments for your short-term goals (less than 2-3 years’ horizon) while invest in equity-related instruments for your goals beyond that time horizon. It also implies that, as a particular goal approaches nearer, move the money invested in equity for that particular goal gradually to debt assets.

Real Estate: Location, price and builder (if taking an under-construction property) are the 3 crucial aspects. General misconception that real-estate will only go up, has been proved wrong time-and-again. Also remember that real estate requires bulk investments, is fairly illiquid if wish to sell it in a hurry and there is a need to look at inflation-adjusted percentage returns of the property rather than only the bulk money returns. It is well documented that over a time-horizon beyond 10 years, equities in general give better returns than property in general! A portfolio consisting of largely real estate can lock you in badly when need arises for cashing it in a hurry.

Bullion: Referring primarily to Gold, bullion generally gives returns matching the rate of inflation. Notwithstanding the way Gold has risen in the past 1 ½ - 2 years, Gold should only be seen as a hedge against inflation, rather than as an investment tool.

With the above as background knowledge about various asset classes, how should one go about investing and saving for life’s future major goals. We give our take below:-

1. Decide on your life’s major Financial Goals and save for them. And while doing that, do not forget about Retirement, where you are likely to spend around 20-30 years of your life. Another word of caution, if you are in receipt of your employer’s pension, don’t count on it to entirely fund those 20-30 years unless you are ready for major financial compromises in later years of life.

2. Invest as per your Risk profile. How much of equity-related products are you comfortable with? Does huge investment in property make you lose a night’s sleep. Take a test on our website at http://www.humfauji.com/risk.aspx.  

3. Decide your Asset Allocation Percentage. Not all eggs in one basket. Change and rebalance it as per changing times – markets, your age and your requirements. Invest in assets with negative correlation amongst themselves, eg, last 5 years’ data indicates that there is hardly any correlation of equity with Gold as also debt instruments in India while it has a very high positive correlation with real-estate. Debt instruments for short-term goals, equity for long-term, some Gold for balancing and some property (one house to stay, one for good rentals).

4. Look beyond Fixed Deposits as part of fixed income allocation. Debt instrument returns get hugely affected by their taxability aspects. Since their returns barely match the inflation, if you further get taxed at 30% on it, a FD of 9.5% will effectively give you only 6.56% return! Instruments like Debt Mutual Funds are far more tax-efficient while being almost as safe.

5. Plan investments across various time-frames. Plan for short-term, medium-term and long-term. Do not mix them. If due to some urgent unavoidable requirement you have to take out money from your long-term funds, do remember to fill back that ‘bucket’ at the earliest opportunity.

6. Tax saving should not cloud your investment needs. Do not invest a large amount or take on a long-term commitment merely for the sake of saving tax. Eg, a Government officer taking medical insurance to save tax under IT sec 80D, buying a property only to get tax advantage on home loan, insurance policy only for tax purpose, are all potential money-wasters.

7. Once invested, be patient for results. Equities will be volatile in the short-term; Property will not shoot up just because you have bought it now; Debt returns will just about match inflation... However, do not hesitate to book losses if you find that results do not match expectations even after you have given it its due time.

8. Invest in an asset class as per its peculiarities. Each asset class has its peculiarities which should be understood and researched BEFORE investing in it. The best way to invest in equity mutual funds is through Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs), lock-in into debt products when interest rates are high, invest in all equity-related products when everybody is professing nothing but gloom and doom, etc.

9. Invest in a Financial Advisor and a life-time financial plan for yourself. Like you need a doctor for good physical health and a Guru for good spiritual health, you need a Financial Planner for your good financial health. Similarly, like a full-body health check-up, you also need a life-time financial plan to be made for you so that you know how to reach where you want to go to.