Is it Recommended to Buy Gold as an Emergency Fund?

Gold has been considered a form of investment and a store of value since historical times. It is a popular choice for its auspicious aesthetic and asset value. Therefore, most Indian investors invest in gold as an emergency corpus, both physically and digitally.

However, this comes with several implications that most fail to consider. This article aims to talk about how gold serves as an emergency fund, along with its limitation. Read on to find out.

1. Considering the More Liquid Form of Gold

Selling the physical form of gold is generally harder due to possible impurities and the need for purity certificates. Therefore, you can invest digitally in a more liquid form like gold, such as Gold ETFs or Gold Mutual Funds, which have a relatively straightforward selling process.

You can redeem your investments within a few days, making gold in digital form more liquid, which can be helpful during emergencies.

2. Diversifying the Emergency Fund

3. Using Gold as a Collateral

Gold loans can be a good option if you need to secure a loan during an emergency. Some financial institutions may accept gold as collateral for a loan. Gold loans also have lower interest rates than other unsecured loans, making them an affordable option.

They require minimal documentation and short processing time, making them convenient for urgent financial needs.

4. Checking the Price Stability of Gold

Assessing how volatility impacts gold prices is one of the key techniques to determine if your gold assets will be enough to cover your emergency reserves. Gold prices have been seen to fluctuate far more in shorter time frames than they do in longer ones, where they remain extremely steady. 

Therefore, if you plan to build an emergency for a longer term, it will yield good results. On the contrary, it may not be suitable for short-term emergency corpus.

Using gold as an emergency fund has several advantages. Here are some of them:

• Liquidity: Gold is a highly liquid asset that can be easily converted into cash. This makes it a good emergency fund as you can quickly sell it in times of need.

• Stability: Gold is a stable asset that has held its value over time. It can serve as a hedge against inflation and currency fluctuations, making it a reliable store of value.

• Diversification: Holding gold as an emergency fund provides diversification to your portfolio. This means that in case of a market downturn, gold can act as a counterbalance to other investments and provide a cushion to your portfolio.

• Security: Gold is a physical asset that can be stored securely, either at home or in a safe deposit box. This provides a sense of security, knowing that your emergency fund is accessible and protected.

• Universality: Gold is recognised and valued all over the world, which makes it a universal form of currency. This means that in case of travel or relocation, your emergency fund can easily be transferred without the need for currency exchange.

Although several Indians buy gold with the idea of turning it into cash during the financial crisis, it has several drawbacks. They include:

• Disadvantages of Gold Jewelleries: Buying gold as jewellery may not be the best move, given all the added making and wastage charges that go into the final price. Moreover, jewellers mostly use 18 to 22-carat gold by adding impurities, so finding buyers is often more difficult.

• Suitable Mostly for Long-Term Investments: The value of gold can be highly volatile and subject to fluctuations in the global market. They mostly increase in value over time, and the more you save, the greater your savings will be. However, the price of gold can heavily fluctuate in the short term. So, if you require breaking your emergency fund quickly, you may incur a loss.

• Storage and Other Fees: Whether you buy physical gold or have a gold savings account, you must pay several additional charges. For instance, to open a gold savings account, you must pay a gold deposit fee. Moreover, you also need to pay an administration fee every time you purchase gold.

On the other hand, physical gold requires secure storage, such as heavy lockers or bank vaults, which also come with a charge. 

• Brokerage Fees: Investing in gold ETFs will cost you more than physical gold, as it comes with management and brokerage fees of your chosen fund house.

• Liquidity: The issue of liquidity comes with the emotional attachment of most Indians to the yellow metal, lack of alternatives or fear of financial loss that can create barriers to selling gold ornaments.

• Limited Potential for Income: Unlike other types of investment, such as stocks, real estate, bonds, and mutual funds, gold does not generate regular income or dividends.

Therefore, it is a non-yielding asset that does not generate ongoing returns. This automatically limits the growth potential of your emergency fund over time compared to other investment options.

• Diversification Risk: Relying solely on a gold emergency fund will lack diversification. Diversification is a vital investment principle to manage risk and maximise profits. Therefore, you will be exposed to concentration risk by putting your entire emergency fund into gold.

In essence, gold can be used as an emergency fund, but it may not be the ideal choice for everyone. It is a tangible asset that retains value and is considered a safe asset during financial uncertainty.

However, gold also has risks, like price volatility and liquidity challenges. Moreover, there may be selling challenges, resulting in potential losses in the short term. So, now that you know about the possible disadvantages of gold as an emergency fund, weigh them against the benefits before investing.