Is buying gold coin each year on Dhanteras a good idea?

Gold bought 10 years ago in 2013, has compounded annual return (CAGR) of 7%. That’s more than the average inflation rate of 5.61% over the last 10 years. This may seem like enough for gold lovers to flock to this yellow metal Dhanteras. However, look under the hood and its appeal may fade.

Net returns on your gold purchase depend on the form of gold you buy. In the case of physical gold (coins or jewellery), which is the most common type of gold that people buy during the Dhanteras festival, net returns are lower.

Take this example. If you bought a 10 gm 22 karat gold coin every year on Dhanteras for the last six years, your Internal Rate of Return (IRR) comes to 7.57%. This is net of costs you have paid in the form of charging fees (7%) and 3% GST. However, the value of physical gold can truly be realized when you exchange it for cash or use it to buy jewellery. On the first option, when you exchange the coins for cash, the jeweler will deduct a 3% fee, bringing the IRR down to 6.59%. If you were buying jewellery, you’ll again be hit with 12% in handling charges and 3% GST, reducing the IRR to a paltry 2.25%.

In contrast, if you invested an amount equal to the price of 10 gms of gold every year on Dhanteras in an exchange-traded fund (ETF), the IRR on such an investment will be 10.36%.

Buying gold coins every year on Dhanteras is suitable for those who intend to use them in the future to buy jewellery. Those who buy jewelery do so for consumption and therefore should not include it as part of their overall portfolio. From an investment perspective, it is a better idea to invest in gold ETFs or buy gold bonds.

It is important to note that gold prices have increased by around 14% over the past year due to geopolitical tensions and a weak global economic outlook. After this jump in gold prices there were three years of stagnation, including a correction in 2021. In fact, over the past 10 years gold prices show the cyclical behavior of the yellow metal.

For example, gold purchased between 2018 and 2023 returned double-digit 13%, but the three-year period from 2020-2023 yielded just 5%. Although it is a good idea to include gold in the investment portfolio, it may not be a good idea to rush to buy it on festivals every year or overdo it as it is increasing in value compared to other asset classes.

BSE Sensex has delivered nearly 11.7% CAGR over the last decade, compared to 7% in gold. Investment advisers say that investors should limit gold to 10% of the total investment portfolio.

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Updated: 09 November 2023, 08:51 PM IST