Investment is the science and art of allocating your money into different asset classes for value appreciation and wealth creation and protection. Apart from providing for expenses like marriage, purchase of first and second homes, education of children etc, your investments will be your sole source of income after retirement. Every investment will generate two types of returns—nominal and real.
A 10% FD worth Rs. 10 lakhs will earn nominal returns of Rs. 1 lakh per annum. However, the real return of this investment will depend on the real increase in your purchasing power. With inflation or the rate of price increase in the economy at 8%, the real return from the FD will be just Rs. 20,000 i.e. 2%. Combined with taxation, your fixed-income investments may end up generating nil or even negative real returns.
While risky options like equity or real estate investments may outpace inflation, low-risk asset classes like bonds, debentures, FDs, PF accounts etc. perform poorly in an inflationary environment. Since fixed-income products are ideal for long-term investment planning, it is imperative to identify options that will help you earn attractive returns with little risk of loss of capital.
Gold is a shield against inflation because it has inherent value. Securities and financial instruments derive their value from external factors like the performance of the company or the economy of the country. Increase in share prices with simultaneous fall in the purchasing power of money will result in zero wealth generation. On the other hand, gold, land, oil, and other commodities or hard assets are less likely to lose value due to inflation.
A blue-chip company can issue new shares. Governments can print more currency notes. However, one cannot just manufacture gold out of thin air. Gold is a precious metal mined from the earth and its supply is limited.
Further, demand for gold too is not dependent on economic parameters. Apart from certain industrial uses, gold is utilized primarily for jewellery and investment purposes. While inflation may hit demand for products and services and consequently impact equity and debt markets negatively, the unique aspects of demand and supply of gold makes it relatively immune to the negative effects of inflation.
It is important to keep in mind that gold is primarily a long-term hedge against inflation. Investing in gold is a smart move if you want a part of your retirement corpus to be secure from the ravages of inflation. Inflation and interest rate variations may cause prices of gold to fluctuate in the short run. However, past performance of gold over the past 50-60 years in India and all over the world shows that no other asset is as effective as gold when it comes to protecting investments from any reduction in the purchasing power of money.
Numbers aside, it is also important to consider the psychological impact of including gold in your long-term investment strategy. The world has witnessed numerous cataclysmic changes over thousands of years. Yet, one thing that has remained constant is mankind’s fascination with gold.
While governments can default and blue-chip companies can go bankrupt, gold is unlikely to lose its value any time in the future. This makes gold the preferred safe haven for investors during troubled times. An investment strategy focusing solely on equity and debt instruments may generate negative real returns during inflationary and recessionary years. Buying gold in a slow and steady manner will help to ensure your investment portfolio does not suffer very high losses. Gold investments will help you enjoy assured liquidity even if you begin investing money in a recessionary environment.
New options like gold monetisation can be used to earn interest on gold investments. Further, the interest can be received as gold or as cash depending on the length of the deposit. In an ideal world, inflation would not be a problem and simply staying invested would be enough to create wealth. Since inflation cannot be wished away, the smartest option would be to invest a part of your funds into physical or demat gold.