"I have `2 lakh to spare. Should I use this to partially prepay my home loan or invest in gold now and sell the gold after a year at a profit to prepay the home loan?"
I was stumped by this question on a TV show recently.
I was stumped, not because I did not have an opinion on it but because of the sheer guts and exuberance of the questioner. He was a salaried IT professional and certainly no expert or speculator on gold. Yet, he was so confident about the annual return from gold being much higher than the sure shot saving of about 12.50% per annum interest that he could make by prepaying his home loan.
Clearly, gold has given such superlative returns in the last four years or so (see chart) that anybody could be forgiven for being carried away.
However, as the chart shows, the annual returns on gold even over the last four years have been quite volatile. During the last 20 years, the annual return from gold as measured by its price on the last working day in March has fluctuated from a high of 37.38% to a low of -14.39%. However, So far in this financial year, gold has given a return of over 80%. Given this, it is anybody's guess what the one-year return will be, going forward.
But the point is not about the possibility of gold continuing its dream run.
A one-time investment in gold is fraught with the same risks as a one-time investment in equity. Like any other asset class for individual investors, it is best to decide the allocation to gold out of their total portfolio and then invest in a systematic investment plan for a fixed amount every month in a gold mutual fund or gold ETF. This considerably reduces the timing risk of the investment decision.
The allocation to gold should not exceed 5-10% of your overall assets at any time. Even if the investor is very bullish on gold and wants to allocate a higher percentage to gold, it should be built through a systematic investment plan and not as a one-time lump sum investment.
I would advise the investor not to take a chance and go for the sure shot return by way of saving on interest through prepayment of the home loan, though I am not sure how many readers would agree with this advice. Investment in gold is such an emotional topic, shrouded as it is by our past traditions, that I am sure they have their own opinion on this
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