One of the elements that investors in general fear is uncertainty. And when it comes to matters like geo-politics one can never be sure how long the dark clouds may prevail. To circumvent such times, it is often recommended that investors may consider having a small allocation to gold. While Gold is not an income-yielding asset, its biggest virtue lies in remaining valuable across currencies and geographies.
The natural human tendency of seeking safety in turbulent times makes gold a safe heaven. This is because inflation rears its head during uncertain times, which reduces the value of paper currencies. Gold on the other hand, cannot be devalued like the currency. So, the yellow metal can effectively protect the portfolio against inflation.
Time and again, during times of uncertainty, gold has rallied - be it at the onset of the pandemic or the ongoing Russia Ukraine conflict. This is largely because gold is known for its role as a hedge against inflation and volatility in other financial assets. This trend is very much visible over the past few weeks, when gold prices have steadily rallied and have crossed the Rs 50,000 mark in the Indian bullion market.
Gold, as an asset
From an investor’s perspective, gold should be looked at from an asset allocation point of view. The general principle is that one can allocate10-15 percent of a portfolio towards gold. The optimal allocation in one’s portfolio can be decided on consultation with a financial advisor. There are multiple ways in which one can take exposure to gold. Other than physical gold, an investor can consider investing in options like Gold ETFs, gold fund/fund of fund or sovereign gold bonds.
Gold ETFs, advantages
When considered from a portfolio perspective, Gold ETF emerges as an optimal choice. A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. In other words, buying Gold ETFs means an investor is purchasing gold in an electronic form.
When compared to physical gold, Gold ETFs offers some distinct advantages. To begin with, an investor, need not worry about storage and theft as gold ETFs are held in demat form. Second, the cost of acquisition is low given the absence of making charges and other related expenses. Third, there is absolute flexibility when it comes to buying and selling. Since gold ETFs are listed on the exchanges, an investor can carry out a transaction at any point in time of the trading hours. Fourth, there is no lock-in period. Fifth, investors can start accumulating gold even with smaller sums of money. Owing to all these reasons, over time there has been a steady rise in investors’ interest towards Gold ETF.
Gold Fund of Funds, another option
For an investor without a demat account, they can consider investing in Gold Fund of Funds. If an investor is planning to meet any future requirement of gold, say a wedding, then such an investor can consider doing a SIP for as low as Rs. 1,000 every month in Gold Fund of Funds. This will enable the investor to collect gold units over a period of time.
So, if you are an investor looking to tap into the investment opportunities that gold as an asset class holds, then taking exposure to the yellow metal through Gold ETFs may be the optimal route. If not, use gold as a portfolio diversification tool and a hedge against uncertainty.
(Chintan Haria, Head - Product Development & Strategy, ICICI Prudential AMC)
