Financial experts advocate for a diversified portfolio with a varied mix of fixed-income securities, equities, and gold to shield yourself against sudden downturns and market swings. Adding gold to the mix helps hedge against other market-linked instruments like equities, acting as a counterbalancing asset and preserving the value of returns.  In this article, we explore how much you should invest in gold from your portfolio and why doing so is prudent. 

• Gold is a safe haven asset that acts as a store of value and offers good hedging against inflationary pressures.
• Ideally, investors should allocate 10%-15% of their portfolios to gold.
• Investors can opt for different gold allocation strategies and revise their allocation based on their age, goals, risk tolerance capacity, and investment horizon. 

For centuries, gold has been used as an investment vehicle. The yellow metal has acted as a store of value for generations becoming a popular and preferred investment avenue. Traditionally, people purchased gold jewellery, ornaments, bars, and coins to invest in the asset. However, this preference has changed in recent times. Today, people invest in digital gold, buy sovereign gold bonds, and gold ETFs to avoid holding the precious metal in physical form.

Investors often wonder how much to invest in gold in their portfolio. The answer is simple: adding gold to your investment portfolio offers good diversification benefits. Gold has a low correlation with most other asset classes. In other words, when stocks and bonds decline, gold prices tend to surge. Moreover, gold acts as an inflationary hedge in your portfolio and protects against currency volatility. When inflation rises, devaluing the purchasing power of money, gold prices also rise, protecting your portfolio returns. 

While we have established the benefits of adding gold to your portfolio, the real question is how much of your portfolio you should invest in gold. Most experts suggest limiting gold to 10%-15% of your portfolio, but you must consider several factors, including your financial goals, risk appetite, and time horizon, before making a choice. Here’s a list of three allocation strategies you can review to understand how much of your portfolio should be invested in gold:

Allocation strategy 1: The 5%-10% allocation approach

This allocation strategy is appealing to those who are confident about the future economic growth of the country, but still wish to add some hedging to their portfolios to protect them against unforeseen events resulting in market downturns. In this case, you allocate 5% to 10% of your total portfolio investment to gold. So if your total portfolio stands at Rs. 50 Lakhs, you dedicate Rs. 25,000 to Rs. 50,000 to gold investments.

Allocation strategy 2: The 15%-25% allocation approach

Investors who are sceptical about the economic outlook of the country and find the possibility of an upcoming economic downturn can increase their gold exposure. Allocating 15%-25% to gold and gold-related assets helps hedge your portfolio against possible market downturns that impact equity returns.

Allocation strategy 3: The 30%-50% allocation approach

When market conditions like rising government debt, increased inflation rates, and devaluing Indian rupee point towards a sharp economic decline, you may feel comfortable allocating a sizable chunk of your portfolio to gold investments. To avoid the equity downfall, you may consider investing 30% to 50% of your portfolio in gold.

When evaluating how much you should invest in gold from your portfolio, it is important to note that you can and must revise your allocation periodically. While a 30%-50% gold allocation may be able to hedge equity risk during market downturns, it may not offer the same returns once the markets recover. Markets change, and it is essential to keep pace with these changes by reallocating your gold investments at regular intervals. Additionally, gold is a valuable hedging tool, but a portfolio with an intense or complete gold concentration is as vulnerable as an all-stock portfolio. Remember that the key to successful investing is diversification.

Generally, experts suggest allocating 15% of your portfolio to gold. If you are a high-risk investor, you can invest 10% in gold and allocate the remaining 5% to equities. At the end of the day, how much you should invest in gold from your portfolio entirely depends on your age, goals, time horizon, and risk capacity. Remember, proper allocation to gold in your portfolio can hedge against market slumps and inflationary pressures to protect the value of your investment.

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