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Monday, February 3, 2014

Save money for jewellery by investing in gold Mutual Funds

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Subhramanyam Iyer’s daughter recently got married. The wedding went off smoothly, just the way Iyer had planned. However, he was unhappy about one thing. Though he had planned for all expenses, the fluctuation in gold prices caught him unawares and Iyer was forced to exceed his budget earmarked for buying jewellery.

When the wedding date was initially fixed, gold prices had fallen quite a bit. Due to this Iyer decided to wait for some time before buying jewellery, in the hope that prices would fall again. Unfortunately, within a month the prices surged again and Iyer was forced to buy the jewellery at a higher price. He had no choice but to shell out more than he had planned to for the jewellery.

Luckily for him, the budget did not go completely haywire. But not every parent planning their child’s marriage will be as lucky.

Gold has become a complex product in last five years, particularly since the global meltdown in 2008. Indians buy gold for personal and/ or investment reasons. Apart from its use in ornaments, gold provides insurance against economic instability and protection against inflation. It can provide liquidity if required. However, all these aspects do not guarantee better returns. It just guarantees hedge in the portfolio.

Gold has always been an unproductive asset. It does not generate income. Unlike stocks and bonds, it’s a type of asset whose value is based only on a belief that it will keep going up. It’s the fear of poor performance of other asset classes that drives the belief in gold. Gold merely has ornamental value i. e. value perceived by the buyer.

Many of us, like Iyer, face the dilemma especially if there is a wedding in the family round the corner So what can we do to prepare ourselves better for our wedding goals in the family? Gold as a physical asset has a holding (storage) cost. Today, given the lack of space and high rentals, many banks don’t offer locker facilities. Even if they do, you have to pay rent for the locker. If you store it at home, you need to invest in security systems or live with the constant fear of it getting stolen. However, if it bought as a financial asset ( Gold ETF or Gold Fund), it not only eliminates storage costs, but also reduces the capital gains taxes and security risk. These assets when sold can give you the cash that you need to buy real gold jewellery for the occasion.

Systematic purchase like SIPs in mutual funds always helps. Set aside your fixed amount that you can use to buy gold ETF or gold fund every month. It helps average out the cost. You can always redeem your ETFs when needed. So, if you are planning to gift your daughter gold at the time of her wedding, you can start investing in a gold ETF by way of SIP. For instance, Gold ETFs from fund houses like Goldman Sachs, HDFC, ICICI Prudential, UTI, SBI, Kotak and many more have given over 12 per cent returns over a threeyear period. You can even redeem your gold ETFs against physical gold, but provided the value is equivalent to the price of 1 kg gold.

One must ensure that with the everchanging economic situation, the portfolio should never have an allocation of more than 10 per cent to gold. Whenever it exceeds that mark, the portfolio should be re- balanced. This helps to safeguard the portfolio against inflation and also lets portfolio grow when gold is going through low cycles. Last but not least, one should change one’s perspective towards gold. Remember it is not the only thing needed for a wedding. It does not give you periodic returns either. While gifting it to the next generation, remember that they may not cherish it the way you do.

Let us look at some of the reasons that impact gold prices.

Rising demand for gold

The rising demand of gold especially in countries like India and China which contribute to over 60 per cent of the global gold imports is one of the reasons why gold prices have gone up. The fluctuation in the global oil market impacts the exchange rates of currency in many countries. So, many of them are forced to store a large amount of raw gold as a measure of dealing with currency risks. This, too, pushes up gold prices.

Falling gold output

The output of gold by major exporters such as Philippines, USA, Australia, South Africa, Canada and others, have seen a steady decline when the demand worldwide is growing. The shortage is causing the prices of gold to rise.

As a result countries like India which are dependent on imports for their entire requirement for gold, are among the worst hit. Hence, we see situations where gold prices in India do not decline to the same extent as global gold prices.

Also, remember that buying gold has lately been hurting economy because it is increasing our current account deficit. As an investment it does not improves one’s returns on investments unlike equity or debt market instruments.

Happy Investing!!

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