Gold Investment Vs Stocks - Should You Invest in Gold or Buy Stocks? Gold ETF

Gold Investment Vs Stocks - Should You Invest in Gold or Buy Stocks? Which Investment Option is More Lucrative? What are the Advantages and Disadvantages of Investing in Gold?

At First let us talk about gold and how much returns gold gave in the past year then you will be shocked to hear.

Gold, in the past year has given a return of more than 25% if I talk until August. There, if we talk about NIFTY 50, then NIFTY 50 in the past year has given a return of around 15%. So on hearing this you must feel that instead of in stocks we should invest in gold.

What are the advantages and disadvantages of investing in gold, when we compare gold and stocks, which investment option is more lucrative?

We will compare here, as a retail investor like you and I, where should we invest and should we invest in gold and if we do then how much should we invest and what are the advantages and disadvantages of investing in gold?

If we talk about gold then we, Indians, are very associated with gold. If I go back a few years then gold was used in the form of currency.  When someone wanted to buy something then used to use gold currency. But after that the coins changed. But gold continued to be an investment option for us Indians.

So we, Indians always think that when we have some extra money then we should invest all that money in gold. Because whenever you have a problem in your life then you can sell that gold and get some money by which you can get rid of your problems. But after that there were a lot of investment options that came in the market. After which, people started thinking that if they invest in other options other than gold, we can get more and better returns.

If we talk about gold then there are mainly two benefits of investing in gold-

• Firstly, that if gold's prices increase then you will get returns.

• Secondly, in India we use gold in a lot of jewellery.

So at one time this fulfils two conditions. Because of which this becomes a preferred way of investment in which a lot of Indians prefer to invest.

Now after gold, in stocks comes the share market and mutual fund. Because a lot of mutual fund invest in stocks, so the biggest difference between them is that, gold is a traditional asset base in which we have been investing till now and if I talk about equity and mutual fund, it is a modern way of investing where people nowadays are planning on investing in and a lot of people have started investing as well.

If I talk short term, then in the past year gold has outperformed stocks. But if we think about investing in stocks for a long term, like I always say that if you want to invest in stock market, it should be for a minimum of 5 years. Now look at five year returns of stocks always comes out to be more than gold.

Apart from this the biggest difference between gold and stocks is that whenever you invest in stock market, you invest in any share, the value of the share is derived from a company. The company that is operational, the company that runs its business and that company's business earns its money for them. Whenever the company's business expands, the company's profit increases, the company's sales increases, its share price increases. Which means by investing in stocks, your value is derived from a business which is a running business.

In the same way when you invest in gold, gold acts as a commodity and it doesn't derive its value from any business. It is a commodity, the way its price goes up and down is because of demand and supply. When its demand is high and supply is low its price goes up. Then from there you get a return as an investor

But if we talk about stocks, stock market's entire value is derived from a company and its price goes up when its business performs well, so the benefit of investing in stocks is that when you research very well, you study a business very well, you think that the business will perform really well in the coming time and when the business goes well, you will get really good returns.

But in gold to be able to guess as retail investor, how demand and supple will behave in the coming time is very difficult. Now you would've understood what the basic difference of investing in gold and stocks are.

Now you must be thinking that I always tell you that you should invest in stocks or mutual funds. Rather I am telling you that you should sometimes make a little investment in gold as well. Here I will give you a different perspective. What are the benefits of investing in gold for an stock market investor?

Whenever you invest in stocks or debt mutual funds or you directly invest in stock market, there is a lot of risk that the market can go down at anytime. If we talk about stocks and gold, whenever the share market goes down then the price of gold goes up and whenever the share market goes very high, the price of gold goes down a little not a lot. So here there is a term which is called hedging, which is used a lot in the industry.  If we talk about hedging then it is a technique that reduces your risk. Like if you keep your entire portfolio in stocks and someday something happens in the market and it goes down, you face an emergency that you require money. At that time if you sell your stocks, you have to seel it with a lot of discount. But here if you would've done hedging, if, here, an equity investor invested 5% of his portfolio in gold, we won't say that you should buy physical gold, you can invest in gold mutual fund, gold ETF or anywhere else, but just 5% investment if you would've done in that if an emergency comes up and the share market goes down, in that case, the prices of gold goes up and if you have to liquidate your position then in that case you can liquidate your position in gold. The benefit of which will be that you will get some money in the case of contingency and that money will come from an asset that, at that time, has gone up.

The second benefit you will from there is that in the case of contingency you will not have to sell your stock market investments because in that case the share market will be down. If you have to dilute the equities then you will have to dilute the equities with a lot of discount and here gold can help your portfolio in hedging really well. This hedge can help a lot in the coming time and this can help you diversify your portfolio as well.

So if you are an investor then you should plan where your investments should be like some of your investment can be in stocks, a little can be in debt and some of your investment can be in gold as well. It is not necessary that it has to be in the physical form but if you keep it in the form of ETF then your overall portfolio will be hedged by gold. Here as an investor you should decide yourself how much of your investment should be in stock market, how much should be in debt and how much in gold.

If we talk about the 100% principle and you are 30 years old then what you can do is, invest 28% in debt, invest 67% in stock market and the remaining 5% can be invested in gold. And that 5% that is invested in gold can help you in hedging and in the coming time, in the case of contingency you can use it.

Let us talk about the last and very important question that is how can we, as retail investors invest in gold? We will tell you 4 ways through which you can invest in gold

• First, physical gold, you can go to a shop and buy physical gold and keep it and that has its benefits and its drawbacks. The benefit of buying physcial gold is that in the coming time if you find the need to make jewellery, you can use that gold and make jewellery. On that you will only have the cost of making it. Apart from that the only drawback of buying physical gold is that you have to pay attention and keep it safe. If you buy physical gold and keep it at your house, it can be stolen. So you have to give extra care in the case of physical gold.

• The second way of investing in gold is investing through mutual fund. Like there are some gold mutual funds. If you invest in them, they go ahead and invest in gold. So if gold has a capital appreciation, the price of gold goes up then you get that much returns.

• The third way of investing in gold is gold ETF. You can invest in gold ETF by going through a broker. Gold ETF trades in the share market like normal gold and here the liquidity is also very good. Which means that you can buy and sell this at anytime. If we talk about expenses then the expenses are lesser in the case of gold ETF as compared to gold mutual fund.

• The fourth and last way through which you can invest in gold is through gold bonds. Gold bonds is normally launched by RBI. Gold bonds were first launched in 2016 in India. You can directly invest in gold bonds through banks or brokers and here the benefit of investing is that along with capital appreciation you often get interest and the interest is around 2-2.5%. 

Coming back to the first question, Should stocks investors invest in gold?

You should invest in gold but in a very small proportion according to you overall portfolio. And first you should gauge your risk about how much risk you want to take because gold is mainly for those people who do not want to take any risk. But in the coming time if you want a lot of growth, you want to make a lot of money through the stock market then it is good that you invest in the stock market.

But along with that a small part of your portfolio, you should keep in gold because whenever something goes wrong in the stock market then that gold acts as a hedge and doesn't let your overall portfolio go very down. And after that you can sell the gold and suppose the entire market goes down, in that case the price of gold goes up and then if you sell the gold and invest that money in the stock market then in the longer horizon you can make more money.

Do you invest in gold? If you do, then in what way do you prefer to invest in gold?

And according to you how much percentage of our overall portfolio should we invest in gold?

Let me know in the Comments below.