Gold vs fixed deposits: Where should you invest?
The good returns and familiarity of gold make us think that it is what we should invest in. But should you focus so much on gold?
The right investment for Vasudha will be the one that will provide the financial support her current situation calls for. She just about manages her expenses with her income. At this stage, the financial risk she is most likely to face is one of insufficient income or no income if she loses her job. Therefore, her focus should primarily be on investments that will support and supplement her salary income if it is required. This implies the investments must generate an income and she should be able to sell or redeem them without the risk of losing value. Her current investments do not meet these requirements.
Gold fails on both parameters. Gold does not generate any income. While Vasudha may be able to sell gold easily, there is a possibility of incurring losses since the price of gold tends to fluctuate a lot in the short-term. Moreover, if she intends to buy physical gold she may not be able to sell it in small pieces to support her income. She may have to liquidate a large portion even if she needs only a small amount of money. She will have to incur the cost of investing the excess funds or hold it in low yielding deposits.
Vasudha should consider gold when she requires growth and not income from her investments. Even in that role, gold should only form some part of her portfolio since it is an asset whose return depends on external factors. On its own it is not productive. The major portion of her investments at this stage should be in incomegenerating investments such as bank deposits, which will also allow her to withdraw according to her requirements. A small portion of the periodic investment can be allocated to gold.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)