On occasions like Dhanteras and Akshaya Tritiya, AMCs and fund distributors advice you to start gold ETFs for financials goals like a child's marriage.
For some reason, many around us seem to think that one must start investing in gold-ETFs because gold is needed for our children's (typically daughters!) marriage. As a result, many end up buying gold ETFs for the wrong reasons.
While tactical advertising has a role to play in such purchases, it would be childish to blame those responsible.
This kind of reasoning is complete nonsense.
If we must pay homage to Goddess Lakshmi, let us do so with commonsense and understand why gold should be part of financial goal planning?
From a financial stand point all you need to conduct a successful wedding ceremony is money. For the kind of marriages that occur these days, you might need a lot of it!
So if you wish to plan for your child's marriage, you need to have a clear idea on the maximum amount of money you would like to spend for the occasion. Unfortunately, this depends on the nature of the marriage, ones cultural background, the nature of our near and dear ones etc. Unfortunate because most wedding expenses defy commonsense.
Many people while planning a wedding cannot think beyond gold. They seem to think that if they have enough gold, the rest of the expenses can be 'managed somehow'. This of course may entail dipping into their retirement corpus!
If one has a reasonable idea about the amount of gold needed for the wedding, there are two ways to acquire it
- Periodic investment: invest in an instrument that typically yields more post-tax returns that gold and simply invest an appropriate amount to cover for all wedding expenses. Buy the gold prior to the wedding. Of course this will work only if the investing starts when the child is quite young.
- Periodic accumulation: periodically accumulate physical gold in the form of jewellery and invest for other wedding expenses separately.
Which is better, periodic accumulation of gold or periodic investment meant for a future gold purchase?
Periodic accumulation could save you from inflation impacting jewel-making charges. However, this brings with it responsibilities of maintenance and safeguarding the gold. This is especially suitable if gold is 'culturally' important. This would also be a good idea if you believe in marrying off your children before they can get a job and stand on their own feet!
Periodic investment is suitable for people who believe in frugality and would like to conduct a simple ceremony - gold-wise and expense-wise! This is also suitable if you are going to allow your kids to choose their own partners and expect them to contribute some amount to the marriage.
I would like to think the choice depends on our frame of mind more than anything else (tax, inflation, returns). It all boils down to what we think about when someone uses gold and marriage in the same sentence.
If gold is crucial for a 'successful' wedding and perhaps the marriage(!), accumulate it periodically. If not, just invest periodically. There is no 'right' or 'wrong' way.
What about gold ETFs?
While investing for a financial goal, it is important to reduce the volatility of the portfolio. The simplest way to achieve this is to ensure that all eggs are not in the same basket: diversification
It is important to invest in instruments whose day-to-day price movements are not dependent on one another. Examples are of course, equity, bonds, gold and other debt paper.
This way if one instrument fails, the others will hold up and reduce the downside risk of the portfolio.
A gold ETF is indeed a smart way to invest in gold ...provided the investment is part of a diversified portfolio.
A well diversified portfolio typically consists of stocks, bonds and commodities (gold, sliver).
It is important to remember that one should also diversify in our stock, bond and commodity choices as well.
That is, the portfolio should be diversified across asset classes and also within each asset class.
Don't start a gold ETF because it is Dhanteras! Start a gold ETF because you want to diversify!
Don't start a gold ETF because you need gold for your daughters marriage! Start a gold ETF because you want to diversify!
If you wish to plan for your long term goals systematically, here is a good starting point:
This is part 1 of a 4-part series on goal-based investing. The other parts can be found here