Are you looking for an investment to preserve your wealth? Do you want to protect your portfolio? You may consider investing your money in gold. It is a safer investment as compared to stocks and helps you diversify your portfolio. An aggressive investor may consider investing in gold. It protects your portfolio during a global crisis. However, gold prices have been steadily rising over some time. It may add some value to your portfolio over the long term.
Let’s have a look at five reasons to include gold in your portfolio.
1. Gold is a hedge against inflation
Inflation is the surge in the price of services and goods over some time. You could find inflation eroding your wealth as money loses its value. You may consider investing in gold if inflation remains high over more extended periods.
The purchasing power of the rupee reduces during inflationary periods. You will find the price of gold rising on public sentiment as investors seek a safe investment avenue. Gold could retain its inherent wealth and serves as a hedge against inflation.
However, you could invest in Gold ETFs instead of physical gold. It is a passive investment that puts your money in gold bullion. You could purchase units representing physical gold in the paper form. You may also consider investing in gold mutual funds to support your portfolio. It puts your money in physical gold or stocks of gold mining companies.
2. Gold diversifies your portfolio
Gold may have a low or negative correlation with many asset classes. Correlation shows you how an asset class moves relative to other asset classes. For example, you may find gold and stocks are inversely related to each other. You could find gold prices rising when the stock market crashes or undergoes a significant correction.
You may consider diversifying your portfolio with gold to shield it from the volatility in the stock market. It is because the price of gold rises in response to events that may cause the value of stocks to fall. You could invest in gold to protect an aggressive portfolio. It is because gold retains its value over the long-term. However, you could limit gold investments to around 10%-15% of your portfolio.
3. Gold offers liquidity to your portfolio
You may consider adding gold to your portfolio to enhance liquidity. You could liquidate gold investments faster as compared to physical assets such as real estate. Gold ETFs and gold mutual funds do not have a lock-in period as compared to the public provident fund or the national savings certificate.
You may sell gold holdings from your portfolio if you need money for a financial emergency. You could also consider availing of a gold loan. It charges lower interest as compared to a personal loan. You may pledge Gold ETFs as collateral and get funds to survive a major financial crisis.
4. Gold is a hedge against geopolitical risk
Gold may perform well during periods of geopolitical turmoil. You may consider gold as a safe haven asset, and you would find its price rising during a global economic crisis. You may feel a significant situation such as war to hurt most asset classes.
However, you could discover the price of gold rising during a geopolitical crisis as investors seek a safe haven to park their funds. You may consider accumulating gold in your portfolio over long periods of time.
You could invest in Gold ETFs or gold funds through the systematic investment plan or the SIP. It is a method of staggering your investment in the asset class over some time. You could invest just Rs 500 per instalment through the systematic investment plan in a Gold ETF or gold fund.
5. Gold prices rise when interest rates are low
You may find gold prices rising when interest rates of fixed income instruments are expected to fall. It is because gold and interest rates may be inversely correlated to each other. You could find lower interest rates of fixed income instruments such as government bonds propelling investors towards gold investments.
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It is because these investments lose their appeal during periods of low-interest rates.
You may diversify your portfolio with gold holdings to protect your investment in a low-interest-rate environment. It helps to protect the value of your portfolio when fixed-income investments such as fixed deposits and small savings schemes are offering lower interest rates.
You may consider putting your money in gold to safeguard your portfolio. Retail inflation is on the rise, and gold investments may help you retain the value of your portfolio. Gold may have a negative correlation with stocks and protects you from the volatility of the stock market. It is also a great investment when interest rates of fixed income instruments could fall. In a nutshell, you may consider holding at least 10%-15% of your portfolio in gold.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
