Gold is a favourite asset for Indian investors. Though it does not provide regular income, it acts as a means of portfolio insurance in times of volatility. While gold has provided good returns over longer periods of time due to rising price, does it have a role in a retirement corpus? Senior citizens generally look for regular income and should have low allocation to risky assets such as equities. If you have invested in gold during your working life, should you hold on to it as you near retirement or are already in your golden years?
Inflation is a big enemy of any investor and the fight gets tougher if it persists for a long period of time. Over a longer time-frame, inflation can nibble into your money’s purchasing power. To fight with inflation, especially healthcare inflation, which is generally higher than the consumer price inflation, you have to prepare well in advance. In that case, gold becomes a good asset to own. Gold tends to do well in inflationary times. Gold prices catch up with inflation. “Among the various asset classes, gold is often considered a hedge against inflation,” Ankit Agarwal, Managing Director, Alankit Ltd, said. It can tide over the losses in purchasing power if your allocation to bond is earning negative real rate of return on bonds.
If you are going to create a portfolio which will help you to maintain your living standards in the long term, then you should invariably have some equity component in it. Experts say that you should have around 10 percent allocated to a diverse equity portfolio – stocks, Index Funds, Large-cap Funds or Multi-cap Funds. As a retiree, you should avoid investing in thematic, sectoral or small-cap focused funds. But when you allocate money to equity funds, you tend to experience volatility, not to mention the huge collapse post the Global Financial Crisis in 2008 or the outbreak of Covid-19 pandemic of 2020. “The main purpose of adding gold to an investment portfolio is to hedge it and provide a cushion against volatility. Among the various asset classes, gold is often considered a hedge against inflation,” Agarwal pointed out.
Senior citizens typically invest large sums in interest-bearing instruments such as fixed deposits, senior citizens saving scheme, Pradhan Mantri Vaya Vandana Yojana. These come with some penalties for premature withdrawal. Investments in equities can be sold quickly but it also subject to volatile market phases. However, gold is less volatile asset compared to equity. Investments in gold, if done using gold exchange traded funds or gold saving fund, provide liquidity in emergencies.
Investment advisors say that though gold does have a role to play in a retirement portfolio, it has to be held for over the long term. “Gold is a cyclical asset in terms of their return and hence it can be added into the portfolio if one has 7+ years of time horizon. The 24-carat gold has delivered 4.3% CAGR over a 5-year period starting from Jul-2011 to Jul-2016 and the last 10 year CAGR stood at 6.5%. However, the last 1-year return on gold is 8% negative. We recommend the investors to avoid adding gold into their portfolio if the time horizon is less than 7 years,” S Sridharan, Founder, Wealth Ladder Direct said.
Agarwal advises investing through paper gold. “Investors should contemplate starting to invest in gold before retirement. You should consider investing through paper gold – gold exchange-traded funds (ETF), fund-of-funds, and sovereign gold bonds (SGBs) – instead of physical gold. These are more cost-effective and more liquid,” Agarwal said.
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