CA Shefali Mundra
The glitter of gold is ravishing for all, but is it a good investment option for the long term?
Well, the majority of Indian households consider gold safe heaven and park huge investible funds in it. It is regarded as a promising and ideal investment option to hedge against inflation and rupee depreciation versus the dollar. Interestingly, the love for gold has been quite prominent in India, and people here set out to buy gold on varied special occasions like marriage, childbirth, and festivals like Diwali. People in India find investing in physical assets like gold and real estate more appealing than investing in equities.
Gold, one of the most precious physical assets, is typically not impacted by market prices. Unfortunately, this works both ways, and gold prices do not rise even when the markets are soaring. Unlike stocks, the return on gold is largely dependent on price appreciation and is not an income-generating asset. Additionally, to secure gold from thefts, there are additional storage and insurance costs. The investment in gold calls for a huge capital outlay which is not the case when investing in stocks. Investing is easy and starts immediately without burning a hole in the pocket.
Gold returns have witnessed significant ups and downs over the last ten years. With a CAGR of approximately 6% (in rupee terms) over the last decade, gold has significantly underperformed compared to NIFTY, bagging a return of 14%.
Although gold and stocks are essential to creating a diversified portfolio, the ability of stocks to offer multi-bagger returns in the long term makes a startling difference between the two. Here's a quick understanding of the factors that clearly highlight the importance of investment in stocks vis-à-vis gold investment.
1. Start Investing Small in Equity.
Investors can conveniently invest small amounts in a diversified range of stocks based on growth prospects, return analysis, fundamental analysis, and risk appetite. For instance, an investor having ₹10,000 can bifurcate and invest this amount in 3 stocks of varied sectors (Pharma, FMCG, Real estate). Small investments across a diversified range of stocks minimize risk and yield higher returns on average.
Counterproductive to this, if an investor invests an entire amount in physical gold, the rate of return is dependent on one product. Also, it involves storage and insurance costs, quality degradation on account of usage, and a dip in the value at the time of resale. Interestingly, investors can invest in gold ETFs to get the prevailing price of pure gold.
2. Higher Returns.
Both stocks and gold have a significant presence in an investor's portfolio but tend to behave differently in the long run. Stocks tend to outperform other asset classes and beat inflation in the long run. Good stock selection with fundamental and technical analysis produces high returns and helps investors successfully survive the tale of the Indian stock market.
Although gold is a good investment option to provide for uncertainties and portfolio diversification, they perform poorly in the bull phase of the market and get influenced by many factors in the Indian economy.
Stocks have outperformed gold in the last decade and delivered higher returns of approximately 11-14% CAGR (Nifty 50/Sensex). Gold delivered a CAGR of 6% in the last decade.
3. High Liquidity.
Conversion of gold into a liquid asset is quite challenging, and sometimes it isn't easy to get the desired valuation on account of the purity percentage of gold. However, it is different from stocks, and it is easy to convert stock into cash. Trades on Indian stock exchanges are settled within two days (T+2 days) after the transaction date. The proliferation of online trading platforms has made it seamless for investors to convert stocks into cash immediately by selling the stock online. The money will get credited within two days of the transaction date.
4. Tax Advantages.
Investment in equity directly or through mutual funds offers numerous tax benefits. As per the IT Act 1961, listed equity shares sold by an investor within 12 months of the purchase will incur STCG (short-term capital gain) or STCL (short-term capital loss). STCG is taxable at the special rate of 15%, irrespective of your tax slab, and STCL is allowed to be set off from capital gains to reduce the overall tax liability. Alternatively, if listed equity is shares sold after 12 months of the date of purchase, then the investor will incur long-term capital gain (LTCG) or long-term capital loss (LTCL). LTCG exceeding ₹1,00,000 will be taxable at the rate of 10% (with applicable surcharge and cess) without the benefit of indexation. LTCL gets adjusted with LTCG. The STCL/LTCL can be adjusted with capital gains and carried forward for eight consecutive years. Further, investors can deposit in ELSS (Equity-linked savings scheme) and save taxes up to ₹1,50,000 under 80C of the IT Act, 1961.
However, in the case of physical gold, short-term capital gain (holding period less than three years) is taxable as per the slab rate and long-term capital gain (holding period more than three years) is taxable at 20% after indexation with applicable surcharge and cess. A GST (Goods and Services Tax) rate of 3% is applicable on purchasing physical gold, and TDS (Tax deducted at source) gets deducted if an investor sells physical gold of value more than ₹2,00,000.
5. Strong Performance in Comparison to Other Asset Classes.
The power of compounding ensures better returns on equity investment than other asset classes. Ace investor and business tycoon Warren Buffett's financial success is attributable to the wealth created by investing in stocks in the initial years of his life span. He has often credited compounding as an ultimate tool to create wealth. He made an average return of 22% on his investments annually.
Additionally, investment in stocks strategically with good growth prospects enables investors to benefit from capital appreciation and dividend income. Understand how to conduct fundamental analysis and choose the best stocks for long-term investment.
Gold investments neither provide the benefit of compounding nor any dividends or interest which can be reinvested for wealth creation.
Erstwhile, gold was considered the best investment to hedge against uncertainties and had a social construct. It was considered an ideal investment option to survive the vicissitudes of the Indian economy. However, with the developments in the financial sector and regulation of the Indian stock markets, the scenario has completely changed.
Equity investment has a proven record of outpacing other asset classes like gold in terms of higher returns, quick conversion into cash, tax advantages, compounding benefits, and beating inflation. To grab the maximum benefits of investing in stocks and earn higher returns, it is essential to choose an easy-to-use and reliable trading and investing platform like FYERS.
Invest wisely in stocks and create a future of wealth like never before!