Rebalancing of investments is an integral part of the financial planning process. The common examples that are given for the process usually deal with either equities or debt, and the shift between these two asset classes.
At the same time, one cannot ignore the fact that even other asset classes—like gold—need an element of rebalancing whenever there is a sharp rise or fall in their value.
Gold Price Spike
There has been a surge in the price of MCX gold in recent times and this has topped the Rs 60,455-mark in India, which is leading to a lot of interest being generated in the precious metal. Along with the usual questions about the future price trajectory, it is important to understand that this bull run has led to big benefits for existing investors.
Those who are holding gold will be witnessing a big gain that is present in their investments, especially when it comes to financial investments. This is the reason why there has to be a strategy in place for the purpose of sale of gold.
The data available from Valueresearch shows that gold funds have returned 13% in the last one year and 12% in the last three years. Even when one looks at the last five years, the compounded annual return comes to 13%.
The Need To Rebalance
Those investors, who have invested in financial gold and are witnessing a high return on these instruments, also need to take a look at the asset allocation in their portfolio. Gold usually occupies a slot with other precious metals in the portfolio and their weightage should ideally be around 5-10%.
If there is a rise in the value beyond the decided asset allocation, then there is a need to ensure that some rebalancing is done. The amount might have to be shifted to fixed income or debt, where the allocation might require a rise in case this is underrepresented. The good thing is that such a shift might be favourable as yields on fixed income instruments have also spiked.
Expectations And Managing Exposure
There has to be a focus on the sale of an asset too. When to sell an investment is as important as when to buy it. One of the reasons an asset class might require some sale is because of the rise in the value skewing the weight in the portfolio or it could be due to some funds being required for a goal. The same process must be applied with respect to gold.
Just because the price has hit a new high does not mean that the entire exposure should be eliminated. There are chances that in the period going forward gold will see an extended bull run as the Federal Reserve in the U.S. finally pauses on the rate hikes and then actually shifts to cutting rates.
A fall in U.S. yields could lead to a rise in the price of gold and this would be beneficial to investors who maintain an exposure to gold in their portfolio.
When financial gold is sold either through an Exchange Traded Fund or a gold savings fund or some other form of digital gold, excluding maturity of Sovereign Gold Bonds, there is a tax impact.
Capital gains, arising from sale of gold, are considered long-term after a period of three years. Gains before this will be considered as short-term capital gains and then added to the income for taxation, according to slab rate. Long-term capital gains is taxed at 20% with the benefit of indexation. In other words, the capital gains—adjusted for inflation—are taxed at 20%.
Investors, on the whole, should be looking at their gold exposure and whether this has risen more than what they would be comfortable with due to the rise in the prices.
At the same time, they need to maintain an exposure to gold in their portfolio as, in the coming years, there is potential for even more gains. Ensuring this balance will be an essential part of the portfolio management process.
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Gold prices stuck to near key levels on Friday, outpacing the dollar for a third straight week as signs of a less hawkish Fed and turmoil in the banking sector saw traders turn to the yellow metal as their preferred safe haven.