Gold is much beyond a luxury commodity. The shiny metal has proven its worth as a safe haven investment during times of economic crisis. It helps with portfolio diversification, helping to mitigate risks. But, investors often tend to limit their investment strategy to debt and equities, which could hurt your portfolio in the long run In fact, it can also help counter the impact of stock market volatility and optimize long-term gains.
Therefore, adding gold ETF or mutual fund via the SIP route could be a sensible decision. It might not offer equal or higher returns like an equity fund but can act as a cushion during a global crisis. So, investors should consider including gold to their collection of financial investments. Take a look at a few solid reasons why this could be a smart move.
Stock Vs Gold: A Negative Correlation
Stock and gold prices do not usually move in the same direction at the same time. This means that when gold price rises, the stock market might be declining. This inverse relationship helps to mitigate losses, since rising prices of one asset compensates for the decline in another. Further, this negative correlation makes gold a safe investment choice and also helps safeguard against inflation.
Asset Diversity
Bonds and stocks might not offer the required diversification to your portfolio. Further, if you do not wish to put all your eggs in just one or two baskets, consider including gold. It can add balance out investments, while shielding you from the stock market volatility. It also retains its value over the long-term, which makes it a fruitful inclusion. A good balance would be to ensure that the share of gold ETF is not more than 15%-20% of the total portfolio.
Inflation Hedge
Rising inflation leads to a spike in gold prices. This is extremely beneficial, since the buying power of paper money erodes with inflation. At this point, gold can act as a cushion against the loss of currency value, since gold retains its inherent value. In fact, gold is known worldwide to perform historically well under inflationary conditions. One reason could be that the other assets like bonds lose their charm for long-term investors. So, using gold to serve your personal or commercial needs is a great option when inflation remains extended for a long period.
Portfolio Liquidity
Gold ETFs can be bought and sold easily. Therefore, adding them to your basket can enhance liquidity. These do not have lock-in periods and can be quickly turned into cash in the event of a financial crisis. Rest assured they do not lose substantial value during conversion. In fact, investors can avail a gold loan for emergencies or for upcoming events, like marriage, travel or home makeovers. You can add a big or small share according to your comfort levels.
In all, paper gold can be a useful part of every portfolio. However, try not to lose sight of your overall financial goals while including investments. Work with a professional to allocate and adjust investments accordingly.
