Want to add some gold to your nest egg? Answer these questions first

As your grandmother probably never tired of philosophising, gold doesn’t go waste. Even the tiniest hook from the thinnest chain would fetch you some returns, she must’ve told you.

She was both right and wrong. Right because gold is never ‘thrown’ away, even the smallest morsel will fetch you a few rupees — it is a safe-haven investment. Wrong because investment is not just about getting some returns; it’s about getting optimal returns. For every rupee that you invest, you need to try and squeeze as big a return as possible, within a risk threshold suitable to your needs and circumstances.

At present, gold prices are trading flat. Should you buy some? Answering some pertinent questions may give you some direction.

Is it jewellery you want?

If you enjoy wearing gold jewellery, you can straight away buy some, be it trinkets with filigree work or chunky pieces in traditional designs. Wearing gold offers a unique joy for some. If you are one of those, no harm in indulging yourself because what you buy will certainly not go waste.

Gold never loses its shine. You can hold on to your favourite pieces lifelong, and pass them on to your near and dear ones whenever you wish. But, if you plan to ‘convert’ your existing jewellery into newer pieces at some point in the future, make sure you invest in quality stuff now. Hallmarking is now mandatory in India, so there’s no way the jeweller can dupe you on the quality of gold. Yet, you may want to check the carats, the wastage percentage, etc, plus how much you are paying for the craftmanship. The greater the non-gold expense in your purchase, the lower the returns.

Hence, when you buy gold jewellery with a lot of precious or semi-precious stones, remember that you may lose quite a bit of what you invested when you try to sell or exchange the piece after a few years.

Care for some biscuits?

Gold biscuits or coins are a favourite Indian buy — they offer the satisfaction of buying the yellow metal sans the expenses of craftsmanship. These can be converted into jewellery at a later date. Some jewellery retailers offer cash, too, but this is something you need to check before buying.

Coins or biscuits are easy to store and liquidate, but remember that they too come with charges for wastage and even craftsmanship. As an investment instrument, these are best suited for those who plan to convert them into jewellery after a few years — say, for a child’s wedding.

Even 10 years ago, ‘chit’ schemes were a popular way of investing in gold. Many came with contests that offered ‘free instalments’ to winners. Those were subsequently done away since the ‘contests’ were considered legally on par with lottery schemes. Following the collapse of a few renowned jewellery firms, chit schemes have lost their shine. These are now considered highly risky, with mediocre returns at best.

How about repurposing MF corpus to gold?

Gold mutual funds (MFs) are basically instruments that invest your money in gold units. It is a popular way to diversify MF investments, and offers easy liquidity (these can be liquidated in short notice and with hardly any hassle). Plus, there is no issue around safety, as there is no physical gold involved in the transaction.

Like any other mutual fund, gold MFs are regulated by SEBI, which offers a high degree of safety. But these funds tend to be highly volatile, waxing and waning with the price of gold in the global markets.

Hence, these are ideally suited for a longer investment horizon, say 8-10 years, said a Bengaluru-based investment expert. “For a 35-year-old professional, I would recommend putting about 10% of his total MF investment in gold MFs, which is a safe haven investment, for about 10 years,” he added.

Will gold ETFs work for you?

An exchange traded fund (ETF), according to Investopedia, is a “basket of securities that trade on an exchange, just like a stock.” “ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually,” it adds.

There are ETFs that invest exclusively in commodities, gold being one. If you have a demat account, you can buy gold ETFs via brokers, both online and offline. Their share prices fluctuate through the day, as ETFs are bought and sold. On the other hand, MFs trade only once a day, after market-close.

This means, if you’re investing in gold ETFs, you should be prepared for intra-day trading to make the best of it; else your investment advisor should be willing to do it for you. You can, of course, be a passive investor in gold ETFs and reap dividends in the long term, but the returns are maximised if you keep a keener eye on the price movements.

Unlike MFs, ETFs do not have SIP (systematic investment plan) options, so you can only invest a lumpsum.

Aren’t there more ‘21^st century’ options?

Yes, there are. Among the options is digital gold, where the metal is sold in a digital format on platforms such Google Pay, PhonePe and Paytm.

The investment can be as low as ₹1. The money you put in is used to procure gold pro rata, and stored in depositories or locker facilities maintained by select companies. Digital gold is said to be easily redeemable. But note that the regulatory mechanism in India may not fully cover this instrument. Make you sure understand the risks.

Another option is sovereign gold bolds (SGBs), which are essentially debt instruments governed by the Reserve Bank of India (RBI), making them super-safe. You can pick up securities denominated in grams of gold issued by the RBI on behalf of the Indian government. There is an assured interest of 2.5% per annum, and the bonds can be redeemed in cash on maturity. SGBs come with eight-year tenures and a five-year lock-in period.

Can you skip gold altogether?

You certainly can, but you might miss out on a great way to diversify and balance your portfolio. Typically, gold rises when other instruments such as stocks and currency markets come down, and the other way round. So, it is a good way to temper your risk.

Wear it, store it in the locker or file it away digitally, gold retains its lustre as a solid asset class.