Gold prices are on the rise after the Russian invasion of Ukraine. Gold rates in the International market crossed $2,000 per ounce recently. Moreover, domestic gold prices are hovering around Rs 55,000 per 10 grams, which is not far from the all-time high of Rs 56,191 in August 2020.
The Indian stock markets are steadily declining amidst the geopolitical crisis. Foreign Portfolio Investors (FPIs) withdrew a massive Rs 18,856 crore from the Indian stock markets in February 2022, fearing the impact of high crude oil prices on the Indian economy. India imports over 80% of its energy needs, and crude oil prices at $110 per barrel can soar domestic inflation. As gold prices increase and the Indian stock markets decline, many investors consider selling equity investments and buying gold. Is this a good idea?
Should you include gold in your portfolio?
Financial Experts recommend having around 5%-10% of your portfolio in gold investments. For instance, you can invest in Gold Exchange Traded Funds (Gold ETFs) or gold funds instead of physical gold.
It helps you avoid the hassles of storage and track your gold investments effortlessly. Gold ETFs are Exchange Traded Funds that track domestic gold prices.
It is listed on the stock exchanges such as NSE and BSE, and you can buy and sell them similarly as shares. However, gold funds are funds of funds that invest in Gold ETF units run by Asset Management Companies (AMCs). It helps you get returns based on gold price movements.
It would help diversify your portfolio with gold investments as they hedge against inflation. Moreover, gold is inversely related to the stock market and protects your portfolio against market fluctuations.
Should you buy gold now?
You may feel tempted to invest in gold, hoping that the gold prices will continue to rise. However, you must invest in gold only for the requisite portfolio allocation and not chase returns from the investment.
Moreover, in hindsight, the best time to buy gold was six months ago. Gold prices may rise in the future even as the rupee remains weak against the US dollar. However, you can follow a wait-and-watch approach and invest in gold only if you don’t have the requisite portfolio allocation.
Should you sell equity investments and buy gold?
You will find your equity portfolio crashing if you have invested in stocks of companies with poor fundamentals. Moreover, your equity mutual fund portfolio goes down if you have not invested based on your risk tolerance.
You must exit equity funds that are not in sync with your financial goals. For example, you can exit thematic funds if you don’t prefer equity mutual funds that focus on a particular theme. It helps to shift to diversified equity funds, which spread your investment across sectors and industries to mitigate investment risk.
It would help if you looked at the current stock market correction as an opportunity to invest in stocks of companies with solid fundamentals. Moreover, you will be able to purchase these stocks at a lower price, and you must stay invested for the long term. Do not exit stocks and equity funds that have performed well over time and match your risk tolerance if you want to achieve financial goals.
You must not sell equity funds to invest in gold. It helps if you start a systematic investment plan (SIP) to invest in equity funds. You will be able to purchase equity fund units at a lower NAV which helps in averaging the unit’s purchase price when the stock markets go up. Moreover, you can invest in gold funds through SIPs to get the requisite portfolio allocation.
No asset class performs well all the time. For instance, gold may do well when the stock market is crashing. It helps if you spread your investments across asset classes such as equity, bonds, gold, etc. In a nutshell, you must allocate your investments across different asset classes to diversify your portfolio.
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.
