Goal-based investing: How to accumulate gold for a child’s marriage
Role of gold in a Big Fat Indian Wedding
When you attend a ‘Big Fat Indian Wedding’, you will see everyone sparkling with gold. The bride, members of both families, guests, etc., everyone will be sparkling with their gold ornaments. For wedding gifts also, gold coins or jewellery is a popular choice. No Indian wedding is complete without the sparkle of gold. Keeping the above scenario in mind, people need to be ready with the required quantity of gold for their child’s wedding. In this article, we will discuss how to accumulate gold for a child’s marriage.
Why is it important to accumulate gold separately?
Earlier, people would accumulate gold for their child’s wedding as part of building a marriage fund. But, the sharp rise in the price of gold over a period of time has necessitated accumulating gold separately from the marriage fund.
The above chart shows how the price of gold has risen from less than Rs. 500 per gram in 2002 to Rs. 4,326 per gram as of 8th December 2021. In the last 20 years, the price of gold has gone up by more than nine times (925%).
At the current price of around Rs. 4,500 per gram, if a parent wants to buy 200 gms of gold for their child's wedding, they will need Rs. 9 lakhs. It is a huge amount to be spent only on gold, and the remaining marriage expenses will be separate. Hence, people accumulate gold separately from the marriage fund.
Steps for accumulating gold for child’s marriage
Let us take an example to understand the process of accumulating gold for a child’s marriage.
Amount of gold to be accumulated
Rajesh’s daughter Komal is 4 years old. He wants to accumulate 250 grams of gold for Komal’s marriage. He wishes that Komal gets married at the age of 25 years.
How much gold needs to be accumulated every month
Komal is 4 years old, and Rajesh needs the gold when Komal turns 25 years old. So Rajesh has 21 years (252 months) to accumulate 250 grams of gold.
Applying the above formula, Rajesh will have to buy 0.99 grams of gold every month. So, if Rajesh accumulates 1 gram of gold every month, he will be able to accumulate 252 grams of gold in 252 months. In this way, he will be able to meet his financial goal of accumulating 250 grams of gold for Komal’s marriage by the time she turns 25 years old.
Rather than buying the entire 250 grams of gold at the time of marriage, a parent can make a goal-based plan to accumulate gold every month using the above formula. Any parent can afford to accumulate small quantities of gold every month in a systematic manner.
Investments for accumulating gold
An investor can look at various financial products for accumulating gold. Some of these include:
A gold exchange-traded fund (ETF) is a financial security that tracks the price of physical gold. Mutual funds offer gold ETFs. If you are disciplined enough to buy gold ETF every month, you can accumulate gold in this manner. One gold ETF unit is equivalent to one gram of gold.
As seen in the above example, Rajesh can accumulate one gold ETF unit (equivalent to one gram of gold) every month for Komal’s marriage. The price of a gold ETF will move up and down as per the price of physical gold. There is no systematic investment plan (SIP) mode available in Gold ETFs.
Gold Fund of Funds (FoFs)
Mutual funds offer a gold fund of funds (FoFs). A gold FoF invests the money collected from its investors in the units of a gold ETF. The benefit of accumulating gold through gold FoF is that it offers the systematic investment plan (SIP) mode of investment which is not available with Gold ETFs. Based on the SIP amount, the equivalent of gold units (one unit is equal to one gram of gold) will be credited to your MF folio account.
If Rajesh wants to invest a fixed amount every month in gold, he can start a SIP in a gold FoF. He will have to review the price of gold once every couple of years and increase the SIP amount if the price of gold has increased substantially. If the price of gold has increased, and if he doesn’t increase the SIP amount, he will get lower units (grams) of gold every month than his target of 1 gram of gold/month. Due to this, he may fall short of his target of 250 grams of gold if he doesn’t adjust (increase) the SIP amount if the price of gold has increased substantially.
Sovereign Gold Bonds (SGBs)
Sovereign Gold Bonds (SGBs) are issued by the Reserve Bank of India (RBI) on behalf of the Government. They have the highest security. SGBs are issued in denominations of 1 gram of gold and multiples. The bond price tracks the price of gold. There are two major differences between SGBs, and other gold-related investment products (gold ETFs and gold FoFs) discussed so far:
- SGBs earn an annual interest of 2.5% p.a., which is paid every six months (1.25%)
- When SGBs are redeemed with the RBI on maturity, there is no long-term capital gains (LTCG) tax.
Hence, SGBs have an advantage over gold ETFs and gold FoFs.
Rajesh can accumulate gold for Komal’s marriage by investing in SGBs. Using this method, he will earn 2.5% additional interest and enjoy exemption from LTCG tax. The RBI announces the SGB issuance calendar in advance. Based on the SGB calendar, Rajesh can plan the purchase of SGBs. After eight years, as and when some of his SGBs mature, he can reinvest the maturity proceeds in the next SGB issue.
Apart from gold ETFs, gold FoFs, and SGBs, there are other ways of investing in gold. Some of these include:
- Gold jewellery
- Gold coins and biscuits
- Digital gold etc.
Gold jewellery, coins, and biscuits being physical in nature, there can be purity questions, and there will be additional costs to be incurred for storage, insurance, etc. Digital gold, although a good way of accumulating gold, is not a regulated product.
Implementation of the gold accumulation plan
In the above section, we saw how Rajesh could calculate the amount of gold to be accumulated every month. It can be arrived at by calculating the overall amount of gold to be accumulated and dividing it by the number of months in which it needs to be accumulated. We also saw the various ways of accumulating gold, including gold ETFs, gold FoFs, SGBs, etc.
The next step for Rajesh is to implement the plan. He needs to start buying gold every month based on the gold product chosen. He should review his plan from time to time to make sure he is on track to meet his financial goal of accumulating the required amount of gold for Komal's marriage. A few months before Komal's marriage, he can redeem the units of the gold product. Using the redemption money, he can buy the gold ornaments for Komal's marriage and enjoy the Big Fat Indian Wedding.
Asset allocation with Glide Invest
The above section has discussed how an investor can make a gold investment plan and choose between various gold products such as gold ETFs, gold FoFs, SGBs, etc. With the Glide Invest App, you have the option to invest in gold FoFs. Based on your risk profile, you will get the recommendations for the best gold mutual fund schemes and other equity and debt mutual fund schemes. You will get advice on planning and systematically investing towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved