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The emergence of digital gold in the modern era, facilitated by electronic platforms, is increasingly becoming one of the preferred options for investors looking to diversify their investment portfolios. While physical gold remained an investment option over the past decades, the option to invest nominal amounts is increasing the demand for digital gold in the present day.
Learn about the need to include gold in your portfolio, the benefits of portfolio diversification and ways to diversify portfolio for financial growth.
Why Include Gold as an Investment in Your Portfolio?
Here are the benefits that you can reap by including gold in your investment portfolio:
Inflation Hedge:
Gold investments have yielded impressive returns averaging around 10% over the past 5 years. During the 2008 financial crisis, gold delivered a substantial return of approximately 48%, contrasting with negative returns from other assets. Moreover, with India's Consumer Price Index indicating an inflation rate of around 4% in 2024, gold holds promise as a hedge against inflation in the Indian market.
Portfolio Diversification:
Gold is a low-risk asset compared to other financial instruments in the Indian market. Thus, including gold in your portfolio can effectively help in diversifying your investments. You can balance the high-risk assets in your portfolio with gold as the low-risk asset. This can protect you from financial losses due to market volatility.
Hedge Against Currency Fluctuations:
The global price of gold is determined in US dollars. As a result, with fluctuations in the US dollar, gold acts as a hedge against currency inflation in India. Even if the value of the Indian rupee falls, the value of gold will increase with the increase in the US dollar.
Benefits of Portfolio Diversification
With the fact that gold helps in diversifying portfolios, you might be willing to know the benefits of portfolio diversification. The benefits help you know the need to diversify portfolio of investments. Here are the benefits that you can reap with portfolio diversification:
Reduced Risk:
Portfolio diversification mitigates risks from underperforming assets and offers protection during market volatility and economic downturns. Conservative investors can benefit by including gold in their portfolios to enhance diversification.
Enhanced Returns:
Portfolio diversification helps increase the return on investment. For instance, if a particular asset in your portfolio is providing a low return, another asset in your portfolio can balance it with high returns.
Greater Flexibility:
Portfolio diversification provides flexibility to investors, allowing them to switch between asset classes to mitigate risks and optimise returns over both short and long terms.
Based on the benefits of diversifying your portfolio and the need to include gold in your portfolio for diversification, there are ways to include gold in your portfolio for maximum return.
Ways to Diversify Your Portfolio for Financial Growth
Here are a few tips to diversify your portfolio with gold:
Physical Gold
Physical gold includes traditional forms such as gold jewellery, coins and bars, which are conventional options for investment. However, investing in physical gold can be challenging with high prices and storage issues. Further, liquidity is an additional challenge associated with physical gold.
Digital Gold
Digital gold is electronic gold where your invested amount holds an equivalent quantity of physical gold with a public-private partnership trustee. As a result, it offers easy liquidity options with no storage issues.
Apps like Jar lets you directly invest in digital gold. Everywhere, you can start with an amount as low as Rs. 10.
Further, you can purchase digital gold with a minimal amount, thereby eliminating the challenges of high investment. Here are some of the options for you to invest in digital gold:
Gold ETF
Gold Exchange-Traded Funds (ETFs) reflect the holdings of gold bullion or gold futures. These are traded in stock exchanges such as the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in India. You can easily invest in gold ETFs at your chosen stock exchange with seamless liquidity options.
Gold Mining Stocks
Gold mining stocks are shares of companies involved in gold exploration, production and extraction. You can invest and trade in gold mining stocks at Indian stock exchanges. Further, you can easily choose the number of units of the stock you want to purchase, thereby ensuring flexibility in your investment portfolio.
Gold Mutual Funds and Index Funds
Gold mutual funds and index funds are a portfolio or pool of funds that include assets associated with gold, ETFs and physical gold. You can diversify your portfolio by investing in gold mutual funds and index funds.
Thus, investing in digital gold offers multiple options to diversify portfolio. You can choose any of the above options to invest in digital gold to reduce your risks and increase your returns in the long run.
Afterword
Gold is a promising investment option to diversify portfolio of investment. You can invest in various forms of digital gold to increase your returns and reduce the risks of losses from underperforming asset classes. A general rule of thumb is to allocate 5-10% of your portfolio towards gold, providing stability and potential growth amidst market fluctuations.
Frequently Asked Questions
1. How much gold should you put in your portfolio?
The amount of gold you should hold in your portfolio varies based on your age, risk appetite and portfolio holdings. However, you can hold at least 5% to 10% of gold in your investment portfolio.
2. How much return on investment can you expect from gold investment?
Over the past decade, the return on investment from gold has been around 10%. However, during the 2008 financial crisis, the return on investment from gold was around 48% which is significantly high compared to other asset classes in the market.
3. What are Sovereign Gold Bonds?
Sovereign Gold Bonds, short for SGBs, are issued by the Reserve Bank of India (RBI), offering gold at the present price during maturity. Additionally, SGBs offer periodic buybacks to enhance investor flexibility.
