MF portfolio - Add a golden sparkle
11/7/2011 10:36 AM Monday
- By HEMANT RUSTAGI
CEO, Wiseinvest Advisors Pvt Ltd
Gold has been performing exceptionally well over the last few years. No wonder an increasing number of investors want to hold gold in their portfolio. While many investors have either added gold to their portfolio or enhanced the exposure level, there are those who are waiting on the sidelines wondering what to do. If you are one of those investors who are unsure about the role gold can play in your portfolio, and how you should go about investing in it, here are some pointers about what you need to do.
Role Of Gold
Although the amazing run in gold prices might make for a compelling reason to invest in it, the key consideration for you should be the likely role of gold in your portfolio. It is equally important to avoid excessively high allocation to it. Besides, after a huge run-up, it would make sense to make a long-term investment in gold from the point of view of diversification, rather than trying to benefit from the price momentum in the short term.
Gold has a valuable role to play in your portfolio, as it has a negative correlation with other preferred asset classes such as equities and debt. The fundamental factors that impact other asset classes don’t affect gold considerably. Moreover, the sources of demand for gold are far more diverse, and that explains the independence of the gold prices as well as the robust demand over the years. Besides, gold also has the potential to provide impressive returns over a sustained buoyant period, as is currently the case. Broadly speaking, 10-15 per cent of your portfolio can be allocated to gold. However, the exact allocation would depend upon factors such as your overall portfolio size, the need to accumulate gold for reasons such as your children’s marriage and the level of diversification required, depending on your risk profile and time horizon.
How To Invest In Gold?
Investing in gold has never been as easy as it is today. Mutual funds offer investors a few effective choices that can eliminate the risks associated with holding physical gold. First, there are Gold Exchange Traded Funds (GETFs). An exchange traded fund with gold as its underlying asset is called a Gold ETF. GETFs allow investment in gold in small denominations of one gram.
This allows an investor to accumulate units over time and take advantage of ‘averaging’. Further, investing in paper gold is more tax-efficient than investing in physical gold. Also, gold held in paper form is not liable for wealth tax. GETFs bring in a level of transparency in gold transactions. These are passively managed funds, An investor can buy and redeem the units through the stock exchanges.
Another option is to invest through ‘fund of funds’ launched by domestic mutual funds to invest in gold mining companies through an international fund. Investing in a scheme like this provides investors access to a fund manager’s expertise and active fund management, which is not available in GETFs. Also, investing in gold mining companies offers investors the upside opportunity through organic/M&A growth, as well as the chance to leverage the increasing price of gold. In other words, investors benefit as the profitability of gold mining companies increases with a rise in gold prices.
The most recent addition to these options is a new breed of open-ended ‘fund of funds’ that invest in domestic Gold ETFs. These funds allow investors to invest in Gold ETFs without having a demat account and without having to approach a stock broker. Besides, those who intend to invest in Gold ETFs through the SIP route can do so in these funds, whereas Gold ETFs do not provide this facility.
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