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

For gold investors, the precious metal has proved to be a satisfactory investment over the past decade.

Gold purchased 10 years ago in 2013 has yielded a 7% compounded annual growth return (CAGR). That’s more than the average inflation rate of 5.61% over the last 10 years. This may seem reason enough for gold lovers to flock to the yellow metal this 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 form of gold people buy during Dhanteras festival, net returns are lower.

Take this example. If you bought one 10 gm 22 karat gold coin each year on Dhanteras in the last six years, your Internal Rate of Return (IRR) comes to 7.57%. This is net of expenses that you paid in the form of making charges (7%) and 3% GST. However, the value of physical gold can truly be realised when you either exchange it for cash or use it to buy jewellery. In the first option, when you exchange the coins for cash, the jeweller will deduct a 3% fee, which brings down the IRR to 6.59%. If you were to get jewellery, you will again shell out about 12% as making charges and 3% GST, which reduces the IRR to a paltry 2.25%.

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

Buying gold coins each year on Dhanteras would suit those who intend to use them in the future to buy jewellery. Those who buy jewellery do so for consumption and hence should not count it as part of their overall portfolio. From an investment perspective, investing in gold ETFs or buying gold bonds is a better idea.

It is important to note that gold prices have increased about 14% over the last one year on the back of geopolitical tensions and weak global economic outlook. This jump in gold prices was followed by three years of stagnancy, including a correction in 2021. In fact, the past 10-year period of gold prices show the yellow metal’s cyclical behaviour.

For instance, gold bought between 2018 and 2023 yielded double-digit returns of 13%, whereas the three-year period from 2020-2023 gave only a 5% return. While including gold in the investment portfolio is a good idea, rushing to buy it on festivals each year or overdoing it may not be a good idea as it has paled in comparison to other asset classes.

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