Investing in gold? Stop! You may lose your hard-earned money
For most households, gold has always been a good investment to help save for the future, also because it can be easily liquidated at the time of need. There are many other reasons that Indian households still prefer to invest in gold.
On a recent visit to my hometown, I was not surprised that people’s views on financial investments have not changed and they still prefer to invest in physical assets like gold and real estate. This is despite the fact that gold has given negative returns over the last five years and real estate returns are also stagnating. Discussions on investing in mutual funds yielded answers like how can we trust them, returns are volatile, we don’t know what it is and how to invest, etc. As Benjamin Franklin said, “The investor’s chief problem-even his worst problem-is likely to be himself.”
For most households, gold has always been a good investment to help save for the future, also because it can be easily liquidated at the time of need. There are many other reasons that Indian households still prefer to invest in gold and these are:
Tangibility: People feel gold is an asset that offers security, even though it may not be performing well or beating inflation. Typically, the feeling is that it can be used for large expenses and emergencies.
Emotional familiarity and inertia: Investment biases tend to be passed down from previous generations and people do not like to question those biases. It’s the same with gold - having seen elders advising risk free investments, one doesn’t see the need to choose other investments, which carry risk. But people forget that what worked earlier may not work going forward, given the changing economic scenario.
Fear of missing out on future returns: Investors also fear that if gold performs in the future, they would regret exiting the investment. Hence, many are not able to take the decision to move into better performing investments.
Jewellery is still the most preferred form of investing in gold, even though it gives lesser returns as compared to investing in a gold Exchange Traded Fund or in the Sovereign Gold Scheme (SGS).
Jewellery carries high overhead charges of approximately 20%, due to wastage charges, making charges, etc. However, most individuals have overexposure to gold in the form of jewellery. It is funny how they view investing in SGS or ETF more risky as the price of gold may vary.
While it is difficult to change such mindset, I would urge investors to think about how they would reach their financial goals if gold does not perform for the next five to 10 years. From FY 2012-13 to FY 2017-18, gold returns on a yearly basis have been between -9.28% and 7.21% per annum, thus, neither beating inflation nor providing capital growth. Gold is an unproductive asset and its prices typically increase at times of uncertainty. A small allocation to gold as a hedge to uncertainties or for personal use, is fine.
Watch this Zee Business video
The best way to overcome the fixation to over investing in gold, is to think about the worst case scenario. Let’s say you are buying gold to fund your child’s education and after 10 years, the return from gold is 2%. How will you fund the education? A little forward thinking and diversification of investments is the way out.
By: Mrin Agarwal
(The writer is Director Finsafe India and Co Founder, Womantra)
Source: DNA Money
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.
RECOMMENDED STORIES
Retirement Planning: SIP+SWP combination; Rs 15,000 monthly SIP for 25 years and then Rs 1,52,000 monthly income for 30 years
Top Gold ETF vs Top Large Cap Mutual Fund 10-year Return Calculator: Which has given higher return on Rs 11 lakh investment; see calculations
Retirement Calculator: 40 years of age, Rs 50,000 monthly expenses; what should be retirement corpus and monthly investment
SBI 444-day FD vs Union Bank of India 333-day FD: Know maturity amount on Rs 4 lakh and Rs 8 lakh investments for general and senior citizens
EPF vs SIP vs PPF Calculator: Rs 12,000 monthly investment for 30 years; which can create highest retirement corpus
Home loan EMI vs Mutual Fund SIP Calculator: Rs 70 lakh home loan EMI for 20 years or SIP equal to EMI for 10 years; which can be easier route to buy home; know maths
03:29 PM IST