Should You Invest in Gold This Akshaya Tritiya? Know Here

We consider gold to be a mark of wealth (symbolic of Goddess Lakshmi), a store of value in times of economic uncertainties, and an asset class that can passed on to generations. During festive seasons and on auspicious muhurats, particularly, we look forward to buying gold.

Among the various gold-buying muhurats, Akshaya Tritiya is a noteworthy one and among the best ones, carrying a lot of significance. It marks the significance of spring.

On Akshaya Tritiya day, the Sun and the Moon are at the acme of their brightness during spring. The word Akshaya in Sanskrit means "never decreasing", and since it is the third lunar day of the bright half of the spring season, it is called Tritiya.

It is believed that investment in gold (or any new asset or business venture for that matter) made on this day shall bring unending or eternal prosperity and good fortune, springing up your financial stature.

But gold, as you know, is near an all-time high. In Indian rupee (INR) terms gold, has crossed Rs 71,000 per 10-gram and in the U.S. Dollar (USD) terms is over USD 2,300 per fine troy ounce as of May 7, 2024.

In 2024, gold has thus far clocked an absolute return of nearly 14% in INR terms, and USD terms around 12% as of May 7, 2024.

Therefore, the obvious question to come to one's mind is: Would It be meaningful to invest in gold this Akshaya Tritiya lone on astronomy, mythology, and emotions?

Well, the fact is spotlights have turned on gold. Watch this video to know why gold is exhibiting its sheen:

There is a confluence of factors that are working in favour of gold, the precious yellow metal...

• Looming geopolitical tensions - To date there are no evident signs of a ceasefire in the Russia-Ukraine war, or conflict in West Asia---particularly the war between Israel and certain militant groups of the region. Plus, the Red Sea crisis (on account of attacks on ships) continues to imperil supply chain issues.

  Besides, North Korea's offensive countermeasures by firing long-range missiles and deepening ties with Russia and China are a concern. The relations between the U.S. and China (the two economic superpowers of the world) seem fraught, relations between China and Taiwan are hostile, India is facing military stand-offs with China at the Line of Actual Control, and more.

• Risk of Geoeconomic fragmentation has increased - This is observed by central banks across the world and the International Monetary Fund (IMF) against the backdrop of simmering geopolitical tensions, which could threaten supply chains, push the prices of goods and services up, and add to policy uncertainty.

• CPI inflation may move - The ongoing disinflation process could be upset if geopolitical tensions escalate, geoeconomic fragmentation becomes a reality, and we witness shocks from climate events. Both, food and fuel inflation could remain elevated. Recognising the risk to the inflation trajectory, major central banks around the world are keeping are close watch on inflation for their monetary policy actions.

• Central banks pushing back rate cuts for later this year - While major central banks have kept the policy interest rates unchanged in the last few meetings, they haven't ruled out rate cuts later in 2024 either. They are only waiting for some confirmation on the ongoing disinflation process and do not want to take premature monetary policy actions.

  Central banks do not want the ongoing disinflation process to de-anchor by reducing the policy interest rates soon. Currently, central banks are also keeping watch on the other incoming macroeconomic indicators. As interest rates move down, it will further bode well for gold due to its inverse correlation with interest rates.

• Public debt is burgeoning in several countries - Global debt (which includes borrowing of the government, corporates, and households) has touched a record-high of USD 307 trillion in 2023, with big increases across both, developed economies (U.S., Japan, France, and the U.K.) and emerging market economies (China, India, Brazil, and Mexico), as per the Institute of International Finance (IIF).

  The global debt-to-GDP ratio is roughly 330%, which means that world debt is around 3.3 times its annual economic growth. In some cases, the debt is higher than the pre-COVID pandemic levels. A higher level of debt amidst elevated interest rates rate is increasing the debt burden and adding to economic uncertainty. In an election year, such a scenario could also weigh on the monetary policy decisions, particularly of the U.S. Federal Reserve; they could be pressured to bring down rates later this year to appease electorates.

• There is uncertainty around general elections this year - Nearly half of the world's population is heading to the polls in 2024. At least 64 countries have their national elections scheduled this year, including India, the U.S. countries in Europe, Mexico, Indonesia, Thailand, North Korea, South Korea, and several others have elections.

  The outcome of the general elections is set to shape government policies and have an impact on geopolitics, macroeconomic conditions, and society at large. So, there is some element of political uncertainty.

  If the election results throw surprises, i.e. it is other than what was largely expected, volatility in high-risk asset classes such as equity would intensify, and the spotlights would be on gold. Remember, that gold and equities, usually, have an inverse correlation.

  [Read: Do General Elections Matter for the Indian Equity Markets]

With the aforementioned factors, gold has caught the attention of smart investors, who are continuing to invest in gold even at a higher price.

Currently, even central banks assessing the risks in play and as part of their reserve management, are holding sizeable gold. In 2024 as well, central banks would continue to buy gold according to the World Gold Council (WGC), which would again prove supportive of gold.

You see, given the risks in play for 2024 and uncertain times, it makes sense to tactically allocate to gold considering its trait a safe haven, commanding a store of value, and a portfolio diversifier.

The graph above signifies that in times when equities disappointed investors -- as they did in 2015, 2016, 2018, and 2022 -- and when fear gripped the world as what we witnessed during the Covid-19 outbreak or when geopolitical tensions intensified, it is gold that has exhibited sheen.

Last year, i.e. 2023, sensing the risk geopolitical and macroeconomic risks, gold even defied high interest rates, and rewarded investors with decent double-digit returns.

Note, that there is no winning asset class year-on-year. Thus, tactically holding some gold in your investment portfolio is worthwhile.

The graph above shows that gold has fared remarkably well in the last decade. The long-term uptrend exhibited by gold cannot be ignored and highlights the importance of owning it in the portfolio.

A fact is that, unlike financial assets, gold is a real asset - meaning gold does not carry credit or counterparty risk.

Thus, strategically allocate around 10% to 15% of your entire investment portfolio towards gold and hold with a long-term view (of over 8 to 10 years) by assuming moderately high risk.

How to invest in gold this Akshaya Tritiya?

This Akshaya Tritiya instead of buying gold in a physical form -- by way of bars, coins or jewellery -- which adds to storage and security cost, plus the risk of theft or being misplaced - it would be wise to invest in gold the smart way in the form of a Gold ETF and/or Gold Savings Fund (which essentially are gold mutual funds).

[Read: Top 5 Gold Mutual Funds for 2024]

Gold ETFs aim to track the domestic price of physical gold; they are passively managed and make direct investments in Gold. To gain exposure to gold without having the hassle of physically holding it, a gold ETF is a worthwhile option.

The investment objective of a gold ETF is to generate returns broadly in line with the domestic price of gold. If gold appreciates, you benefit.

The units purchased will be backed by 0.995 finesse of physical gold by the respective fund house. The physical gold is held in vaults by an appointed custodian for the ETF on your, the investors' behalf, plus insured and valued periodically, as per the guidelines stipulated by the Securities and Exchange Board of India (SEBI).

To invest in Gold ETFs, you need a demat account and trading account, and the purchase order can be placed through your broker - just like the way you buy shares on the recognised stock exchange. Conversion of gold ETF units into physical gold at a future date is also possible for a certain quantity (usually 1 kg.)

A Gold Saving Fund, on the other hand, is a fund-of-fund scheme investing in underlying Gold ETFs, which benchmarks the performance against the prices of physical gold. It strives to produce parallel returns that closely resemble the underlying Gold ETF and price of gold.

The investment objective of a Gold Savings Fund is to generate returns that closely correspond to returns generated by the underlying Gold ETF.

The advantage of investing in a Gold Savings Fund is that you can invest through the regular investment process without holding or opening a demat account. The units of the Gold Savings Fund will be purchased at the NAV declared by the fund house, and the allotted units will be reflected in your mutual fund account statement.

Furthermore, it facilitates investing in a disciplined manner through the Systematic Investment Plan (SIP) mode with a sum of as little as Rs 500. It offers affordability, convenience, flexibility, potential for long-term wealth creation, and liquidity.

At a time when prices of gold have moved up, it makes sense to stagger your investment in gold (as against investing a lump sum) currently. After the sharp run-up in prices, some drawdown in the price of gold is possible. In this respect, to mitigate the price volatility in the interim, systematic investments in gold with SIP in a Gold Savings Fund make sense for rupee-cost, for investment discipline, and over the long term could offer decent returns.

Tax Implications of Investing in Gold ETFs and/or Gold Savings Funds

After the passage of the Finance Bill 2023, the taxation of gold mutual funds has changed. They are non-equity-oriented funds for tax purposes. The returns earned on gold mutual funds are now taxed at the marginal rate of taxation, i.e. as per your income-tax slab, irrespective of whether Short Term Capital Gain (STCG) or Long Term Capital Gain (LTCG).

That said, just because the tax rule has changed does not mean you should avoid investing in gold ETF and/or gold savings fund. At present, there are enough convincing reasons to invest in gold.

Be a thoughtful investor and buy gold sensibly this Akshaya Tritiya.

Happy Investing!

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