Gold has a long history of being associated with wealth and tradition, often finding its way to make each of our occasions special. Now, with the recent surge in demand for gold, it highlights the growth and return potential that gold holds as an asset class. This love for gold seems to have only peaked in recent times, raising an important question...
Should you consider adding gold to your long-term investment portfolio?
To answer this, let's look at how gold has performed as an asset class to the capital markets in the past 22 years. Let's say you started with an initial investment of ₹100 in gold. We'll see how it has performed over time compared to the NIFTY Total Return Index.
This shaded area is where Gold outperformed the Nifty. Interestingly, over the last 22 years, Gold hasn't exactly kept pace with the equity, but it's not as clear-cut as one might expect. Let's take a closer look at the annualized returns for both of them during this same period.
Nifty Vs Gold
​Performance | Nifty TRI | Gold |
CAGR | 13.7 | 11.6 |
Volatility | 22.9 | 21.5 |
Worst Drawdown | -59.5 | -35.7 |
Nifty has provided an annualized return of 2.1% higher than gold. But, it's crucial to consider volatility, which tells us how much these investments fluctuate. In the case of Nifty, for every unit of risk, you get a 0.59% return, while Gold gives you a 0.53% return for every unit of risk.
- Now, that might not sound like much, but when you let this difference compound over a 23-year stretch, it can actually have a notable impact on your overall portfolio.
The Gold Edge in your portfolio
However, What's worth noting beyond the returns, is how gold has consistently shown positive performance during global crises when equities have been plummeting.
Let's take a closer look at two major crises, one in 2008 and another in 2020:
In 2020, despite the nifty ending the year with a positive return of 16.1%, the nifty took a hit in March, plummeting by about 33%. However, gold prices surged during the same period, gaining around 20.8%.
Back in 2008, when the Nifty saw a massive drop of -51%, gold delivered a remarkable return of 32.4%.
What's driving this difference in performance?
Whenever there is a sudden panic & uncertainty in the market, investors take position in gold driving its demand in uncertainty times leading to its high prices. But why gold?
Lack of Economic and Geopolitical Risks: Unlike other assets such as stocks and currencies, gold is not subject to the same economic and geopolitical risks. It doesn't rely on the stability of governments or the health of financial markets, which can be highly volatile during uncertain times.
Liquidity: Gold is a highly liquid asset. It can be quickly converted into cash or other forms of currency when needed. This liquidity makes it convenient for investors looking to move their wealth into a more stable and accessible form during a crisis.
Protection against Inflation: During times of economic uncertainty, central banks may increase the money supply, which can lead to a decrease in the purchasing power of currency (inflation). Gold's limited supply makes it a hedge against inflation because its value tends to increase as the supply of gold remains relatively constant.
This makes gold an attractive addition to a portfolio as a hedge against equity market volatility and economic downturns, helping to preserve and grow wealth.
Gold Vs Equity: The Ease Factor
When comparing gold and equity investments, it's not just about the returns; there are practical considerations to keep in mind.Equity-related assets like stocks and mutual funds offer a hassle-free experience. You can easily buy and hold them through a demat account. Plus, when you need to sell, you'll get your money within 24 hours, thanks to a T+1 day settlement process.
On the other hand, if you opt for physical gold (the traditional way many of us are familiar with), you'll encounter some challenges, including:
- Purchase costs, which include making and designing charges, making it a bit pricier.
- Ongoing expenses for storage, security, and insurance.
- Uncertainty about selling prices, and the potential for negotiations on making and selling charges.
- Time-consuming processes and associated costs.
- Inconvenience when selling due to possible impurities and the need for origination and purity certificates.
How to invest in Gold?
Taking all these into consideration with the evolution of financial markets in India there is been an advancement of gold products such as-
​Investment Option | Key Costs | ​Taxation | Lock-in Period | ​Minimum Investment | ​Availability |
Gold Funds/ ETF | Around 1% p.a. | ​As per Tax Slab | ​NIL | ​Rs 10-100 | ​Readily available through your demat account |
Sovereign Gold Bonds (SGBs) | Zero | No tax on redemption | ​8 years | Price of 1gm of gold | ​Released by the RBI periodically with a 5-day buying window |
Digital Gold | 3% GST | Holding > 3yrs = 20% LTCG with indexation Holding < 3yrs = As per tax slab | NIL | Rs 1 | Readily available |
Gold Fund: It's a diversified investment that includes physical gold, gold futures and options, and gold bullion certificates, all managed by a professional fund manager. The key advantage here is the absence of a lock-in period, which means you can easily convert your gold investments into cash, similar to your other investment funds. This flexibility can be highly beneficial, especially during a market crisis when immediate liquidity may be essential.
Soverign Gold Bonds (SGBs): While the cost here is nearly negligible, it's worth considering that SGBs entail an 8-year lock-in period, making them a suitable choice for individuals who prioritize long-term investments and can forego immediate liquidity access for the duration of 8 years.
Digital Gold: If holding the value of gold is what you prioritize, then it's a viable option to consider, but it's important to note that it comes with relatively higher costs compared to the other options.
More than just Investments...
Nevertheless, we do realize the value of gold which extends beyond mere investments. Many among us opt to maintain physical gold despite the associated operational costs, with the intention of using it, either as jewelry or as a tangible asset in the future.
From the CW Research desk: Instead of buying and storing actual gold, we offer you platforms where you can invest digitally and withdraw it as physical gold in the form of coins or jewelry as you wish. This eliminates the need to buy physical gold for later use and also saves you the trouble of buying and storing physical gold.
How much gold should you add to your portfolio?
It boils down to understanding what your portfolio stands for, which often involves growth aligned with your financial goals. So, a significant part of your portfolio should be geared towards growth, in line with your risk appetite.
Recognizing the significance of gold as an inflation hedge, it can serve as valuable diversification, particularly when both the debt and equity portions of a portfolio show volatility. Although such instances are relatively uncommon in comparison to opportunities in the market, they can have a significant impact on your financial health.
Therefore, based on our research from the CW desk, we would suggest allocating 3-5% of your overall portfolio to gold.
In Conclusion
Whether you seek stability or a safeguard against uncertainty, gold can be a valuable addition to your investment strategy when invested with the right strategy and finding the right balance between different asset classes to align your entire financial strategy with your financial goals. That's where our expertise has been valuable to you in understanding how gold fits well within your overall portfolio strategy and how to adeptly navigate the risks and opportunities inherent in each asset class.