Gold has long been valued as a tool for portfolio diversification. It helps in wealth preservation, and gives protection against uncertainty. It has also delivered strong long-term returns, making it an attractive asset for investors.
But as gold prices rise sharply, buying a meaningful quantity has become increasingly expensive. For investors who still want exposure to gold, borrowing money or purchasing gold through EMI is one option. But does it make sense?
Cost Of buying Rs 2 Lakh Worth Of Gold On EMI:
Loan: Rs 2,00,000
Interest: 10%
Monthly EMI: Rs 4,249
Loan tenure: 5 years
Total repayment: Rs 2,54,940
Total interest: Rs 54,940
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This means that you are effectively paying Rs 54,940 in interest to own Rs 2 lakh worth of gold today.
If Gold Grows At 10%:
Gold's historical performance has been strong in several periods. Data shows that it has on an average delivered 10% returns. Though, past performance does not guarantee future gains, assuming the same calculator:
Initial gold investment: Rs 2,00,000
Gold value after 5 years at 10% CAGR: Rs 3,22,102
Total loan repayments: Rs 2,54,940
Difference: Rs 67,162
The calculation shows that there is a profit of roughly Rs 67,000. While this may look impressive at first, you need to compare your returns had you not taken a debt and simply invested the money that would have gone into the EMI.
Assuming you invest Rs 4,249 into Gold ETF at 10% returns:
Time: 5 years
SIP: Rs 4,249
Return: 10%
Final value after 5 years: Rs 3.29 lakh
This value is slightly higher compared to case 1. While you may think that it does not make a lot of difference, you need to understand that in this case, debt is not involved. This means there is no risk of missing EMIs or facing penalties. You can also stop SIPs when there is a cash flow issue.
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Unless you want the gold immediately for wedding or personal reasons, the SIP route allows you to be more financially responsible. You continue to add gold to your portfolio gradually, while having no risk of debt.
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