Gold breached Rs 18,000 per 10 grams level on November 25. The reasons for this spurt in price are:

1. A weakening dollar

2. Buying by stockists for marriage season

3. Reports that the central banks may buy more gold from the International Monetary Fund

4. Rising inflation and doubts about economic recovery

The current price level is unprecedented and it's making many people realise the importance of diversifying asset allocation and looking at gold as an investment. Don't get carried away by the rising prices as it may prove to be foolhardy. Let us see why you should invest in gold for reasons other than capital appreciation:

Safety: In volatile and uncertain times (as seen recently due to recession) gold provides a safe haven as there is no default risk. Gold has its own intrinsic value.

Brings diversification and stability to a portfolio: the forces acting on gold are different from those acting on other financial assets. Most of the time it is negatively correlated to stocks and bonds.

Highly liquid and portable: Gold can easily be converted to cash and vice versa, prices are internationally determined.
Tool against inflation: Irrespective of market cycles the purchasing power of gold stays intact over a long period of time. It's better to keep your cash in the form of gold.

Less regulatory intervention: You don't have elaborate disclosure norms for gold as it is for many other asset classes. Gold can be a very private investment.

Jewellery: It is one of the oldest forms of investment which also has some amount of pride and honour attached in Indian families.

It is something you can use and enjoy but at the same time it keeps appreciating in value. But the price of jewellery is usually marked by anywhere between 20 to 200 per cent depending on the complexity of design.

This makes it unattractive as an investment.

Gold bars and coins: Gold coins and bars are increasingly becoming popular not only as investments but also as gifts. But they have to be physically stored which can be a security nightmare. You might have to incur extra cost in renting a bank locker or insuring your possession.

Moreover you have to be careful about adulterated and fake gold bars and coins. There can be a substantial difference between buy and sell rate of gold coins and bars.

More popularly known as ETFs, these are open-ended mutual fund schemes that invest the money collected from investors in standard gold bullion (0.995 purity). The investor's holding is denoted in units, which is listed on the stock exchange just like a share.

It is expressed as NAV (net asset value) which represents the price of one unit (equivalent to one gram of gold) on that particular day.

These are many advantages of ETFs vis-a-vis physical gold when seen from an investment perspective:

• No need to worry about the security and storage
• No need to worry about quality of the gold
• No need to worry about resale as the exchange provides comfortable liquidity (just like shares)
• No making charges
• You can invest very small amount of money (minimum one unit) which is not possible in case of jewellery and coins/bars.
• No wealth tax. Long term capital gains just after a year whereas it is three years in case of physical gold. ETF is a tax smart investment as well.

Gold ETFs are offered by Benchmark, Kotak, SBI, UTI, Quantum and Reliance. Among these, the ETF offered by Benchmark AMC (Gold Bees) is the most preferred among investors.

It has the lowest expense ratio of one per cent and can be bought and sold at the click of a button using your demat account. It's listed on the National Stock Exchange (NSE).

How to invest?

There is no SIP facility in any of these funds. If you want to build a credible gold portfolio then invest in a staggered manner, certain amount at every fall in price or at regular intervals. Timing the market is rarely possible.

Look at your investments as a portfolio and it should include gold among other asset classes like equity, fixed income, debt, real estate etc. In this way your investments give good return during times of boom and protect you during recession. You should also look at holistic financial planning to achieve this task.