Should one invest in gold?

We always keep reading that gold is the best hedge against inflation. Gold prices have been going up for quite some time now. The way it is going up, it could be treated as an investment instead of treating it as a hedging tool. Many people have already started investing in gold, but then safety of storing gold is an issue.

A better way would be to purchase as a mutual fund unit in a gold exchange traded fund. That way, you would also have liquidity, since the price of the unit would rise as the price of gold prices and could be sold anytime through the stock exchange. But why should we treat it as an investment option?

Some of the reasons are the appreciation in the value of the US dollar and rise in the interest rates. The economy of most of the so called advanced economies is in a bad state and it does not look like there will be recovery soon. Most of the countries hold back their currency with gold reserves, so most of them would either increase their gold reserves.

Worldwide people have started investing in gold exchange traded funds. These funds back their units by buying gold. This has also increased the demand for gold. For the purpose of improving the economy most of the governments have increased their spending to increase the money supply in the economy.

More the money, more the chances of that money finding its way into gold and more the demand for gold, the prices will go up. Taking the past trend we might say that gold does not give good returns. But is that true? Have we not seen prices of gold just sky rocketing.

Gold prices go up, but they do not give returns as good as those of other investments. This is the reason it is a good investment option for those who do not like to take risks. With news that many countries on the verge of sovereign defaults and rising interest rates, there would be more demand for gold. So buy gold now.

An expert in selection of Equity

Do you think you are an expert in selection of equity shares? Do you have time to track your portfolio of Equity Shares purchased. Is the number of equity shares in your portfolio only increasing and you are not able to cash out? Then why did you purchase equity shares of many companies.

If you do not have time and expertise, then you should leave the decision making of when to buy and sell equity share to experts. Yes, we would all like to buy an equity share and hope it doubles or triples in 2 or 3 years, but it does not always happen. You have to keep studying the company’s financial statements and then take a decision.

We usually buy based on tips and reviews given by experts. But if the tips have been given by experts, the time taken for the tips and reviews to reach ordinary mortals like us would be a day or two and in that time the price would have gone up. But if you still believe then wait for a dip and purchase.

The ability of a person to track his / her holding is around 20 equity shares. This is assuming he puts in enough time to read and study his/her equity shares. Even when you keep track, you should know your long term goal and your risk appetite. Since the market keeps going up and down on a daily basis. Sometimes it falls for 3 to 5 days in a row.

And if such a thing happens your portfolio will fall. But if you look closely some equity shares would have fallen more than the others or some might have actually rising. This can happen only if you have had diversification of equity shares from different sectors. So the key to a good portfolio is diversification.

A good investor selects some shares which s/he buys as a security deposit. These shares s/he will rarely trade in. These shares s/he has great hopes in and would like to keep adding as and when s/he gets an opportunity. Of course s/he might have other shares which are meant for profit making (sometimes loss making).

However good you might be never put more than 20% of your equity investments in one company. Too much exposure to one company is very risky, profits might be good, but in case of loss that too would be good. Sometimes there are special occasion’s viz. buyback, dividends, bonus etc.

In such cases one should check the risks and then take a decision. In any case do not touch your security deposit. As we had discussed earlier do you have equity shares which you had purchased in the hope of making quick profits and still holding them and you feel if was a wrong decision, sell.

Yes, you would have made a loss, but your money is not locked and you can use it to make some money or another mistake. But holding on to such shares would only erode your capital. If you had purchased an equity share for the short term and set a target, sell it on reaching the target.

Paper profits would only increase your portfolio in the short term. If you feel you want to keep it move it to your security deposit.

Insurance, Do I need it

What do you think is insurance? Insurance is a promise of reimbursement in case of loss. Many insurance companies keep advertising asking us to get insured. What is their interest in it?  When you go to an insurance company and ask them to cover a certain risk, they charge a fee to take a risk, this fee is called premium.

The more the premium collected and risk not materializing increases their profits, hence the reason for them to advertise. So should you insure yourself? When we go for insurance we usually go to the insurance companies to buy ULIP’s or endowment plans i.e. where we would get a return.

If we talk of return, we are not insuring, but are investing. We should understand that insurance and investment are two different things. Insurance is a tool for protecting your risk and insurance company’s main job is insurance and not investing. So when you go to an insurance company, go to them only for insurance.

So now we decided that we go to an insurance company for insurance, what is the amount I should insure myself for? Assume that if something happens to you today, how your family will be taken care of, it could be out of your savings or it could also be out of insurance.

Usually a person should insure himself / herself by around 10 times of his / her annual income. Another method would be to take into account the expected expenses the family would have to bear without you, include child’s education, marriage, loans and other expenses.

Now if you go for so much of insurance and go for money back plan the premium would be high, but if you go for a pure term plan it would be cheap. Another thing you could do is increasing your insurance cover over a period of time, so when you are young, your risk level is low, so you can pay a lower premium payments.

But remember the premiums are usually locked depending on your age, so when you are young the premium per year would be lower, so start your insurance policy early. One more insurance policy you should not forget is a health insurance policy. If you have a family, go for a policy with family floater, you get a bigger cover and less premium, than if you take an individual health insurance policy.