This is why all that glitters now is gold and also why many investors have embraced the yellow metal’s luster. Gold prices have given over 14% returns in the one-year period ended March 30, even as the equity market remained sluggish during this period. For example, the S&P BSE Sensex has given a return of just 2% during this period.
Equity or gold, or both? This has been the subject of a long-standing debate in personal finance. Equity-bulls point to the wealth creation power in stocks that comes from economic growth and increased corporate profits over time. Gold, however, does not pay any interest or dividends. The rise in gold prices is only a result of its limited supply, even though the stock of money chasing it keeps on increasing. Add to this the demand for gold jewelery among women, especially in Asia. Also, it has a negative correlation with equity. Therefore, despite its grim outlook, gold has a place in an investor’s portfolio because it is a powerful diversifier.
very long term
If you look at the very long term, gold does not constitute an asset like equity. The opening value of Sensex in 1986 was 549. As of March 30, it was around 58,000. From 1986 to 2023, the Sensex compounded at 13.4%. The average price of gold in 1986 was 4,625 per ounce. today, it is around 1.6 lakhs. What has been the return of gold? The answer is a compound annual growth rate (CAGR) of 10%. This means that one rupee invested in Sensex in 1986 has got a return 105 While the value invested in gold is fair Today 31. The disparity between the two also applies to lower time frames. The 10 year CAGR of gold is 6% as compared to 13% for equities. Worse yet, gold’s returns are lousy. After a long pause, it suddenly rises.
View Full Image
Equities, which tend to have a more steady upward climb, are also volatile. It goes through a long phase where there is no return. This can be seen if you compare the three year rolling returns of the two assets. Rolling returns are a concept that adjusts for different start and end dates. The minimum 3-year rolling return in equities over the past 15 years (using NiftyBES, a Nifty Exchange Traded Fund as a proxy) is -6%. In case of gold this figure is -9%. The average (average) 3 year rolling return for equities is also higher at 11.1% compared to 10.1% for gold.
gold in your portfolio
The case for gold is one of diversification. If you compare the asset’s returns for each fiscal year from 2013 to 2022, you will see that both the assets have a negative correlation of -0.6. In other words, equities perform well when gold falls and vice versa. This enhances portfolio stability, giving you a more consistent investment experience. This is the only reason to have gold in your portfolio, even if it means you are sacrificing some returns compared to a 100% equity portfolio. Generally, financial planners recommend an allocation between 10% to 20% in gold, depending on your risk appetite and market conditions. “Due to its negative correlation with relatively riskier assets like equities, gold is a good way to diversify one’s investment portfolio. Gold is also a good diversifier for those times when the rupee is depreciating rapidly. Gold allocation can be a part of one’s portfolio and can be rebalanced at regular intervals to maintain your original asset allocation goal, said Dipesh Raghav, founder, Personal Finance Planning.
How can you invest in gold?
You can invest through Gold ETFs (Exchange Traded Funds) or Gold Savings Funds. However, the gain will be treated as short term from April 1 irrespective of the holding period. In contrast, gains in physical gold after a period of 3 years will be taxed at 20% and you will get the benefit of indexation. The same treatment is applicable for gains in sovereign gold bonds after the lock-in period of 5 years. These bonds are issued by the government from time to time and track the price of gold. You can buy them through your bank or broking account. If you hold them till maturity (eight years), the income is tax-free.
You can also invest in gold through multi-asset funds, which hold different asset classes like equity, debt and gold. However, check the asset allocation in such funds. If the allocation in equity is 35% or less, it will be treated like a debt fund, which means capital gains will be taxed at the income tax slab rate of the investor. Equity of 65% or more would mean that the tax rate for gains above that would drop to 10% 1 Lac. This is applicable when the holding period is more than one year and the long-term capital gains tax rate is applicable.
catch all business News, market news, today’s fresh news events and Breaking News Update on Live Mint. download mint news app To get daily market updates.