Gold has been a symbol of wealth and stability for centuries. But does it still hold a place in your modern investment portfolio? Let's weigh the benefits and drawbacks of this precious metal to help you decide.
Benefits of Investing in Gold:
Hedge against inflation: Historically, gold prices have tended to rise with inflation, protecting the purchasing power of your investment. When the value of paper currencies declines, gold often maintains its value.
Safe haven asset: During economic or political turmoil, gold is often seen as a safe haven, meaning its price can increase as investors seek refuge from volatile markets.
Diversification: Gold has a low correlation with other asset classes like stocks and bonds. This means adding gold to your portfolio can help spread risk and potentially smooth out overall returns.
High liquidity: Gold is a highly liquid asset, meaning it can be easily bought and sold in various forms, making it readily accessible when needed.
Drawbacks of Investing in Gold:
Limited income generation: Unlike stocks that pay dividends or bonds that pay interest, gold doesn't generate any passive income. Your returns are solely based on price appreciation.
Storage costs: If you choose to invest in physical gold, you'll incur costs associated with secure storage and insurance.
Digital Gold and Taxation: Buying digital gold gets taxed quite aggressively
Capital Gains Tax:
Short-Term Capital Gains (STCG): If you sell your digital gold holdings within 36 months of purchase, any profits are classified as Short-Term Capital Gains. These are added to your regular taxable income and taxed according to your income tax slab.
Long-Term Capital Gains (LTCG): If you sell your digital gold after holding it for more than 36 months, the profits are considered Long-Term Capital Gains. These are taxed at a flat rate of 20% with indexation benefits (adjusting the purchase price for inflation), plus a surcharge and cess.
Underperformance compared to other assets: Over the long term, gold has generally not kept up with the returns of stocks and bonds.
Gold is Volatile: Volatility points to the movement of price of the underlying instrument. The price of Gold can fluctuate quite rapidly over a period of days. One of the reasons most households are comfortable holding physical gold as an investment is because of habit but also because most households do not track the price of gold on a day to day basis.
Is Gold Right for You?
The decision to invest in gold depends on your individual financial goals, risk tolerance, and investment horizon. Gold can be a valuable addition to a diversified portfolio, especially for those seeking stability and protection during uncertain times. However, it's important to be aware of its limitations and not over allocate your portfolio to this asset class.
Remember:
Conduct thorough research: Before making any investment decisions, always do your own research and understand the risks involved. Here is a comparison of investment of Gold vs Nifty 50 Index between 2013-2021
Invest responsibly: Never invest more than you can afford to lose, and ensure your portfolio is diversified across various asset classes to achieve your long-term goals.
Mixing Gold with Equities and Bond is a way to create a diversified portfolio with lower drawdowns and lower volatility. However this will result in lower overall returns to the portfolio. This is a topic we will delve into under the topic Portfolio Theory and construction.
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