GOLDen Words

Should Gold be part of your investment portfolio? If yes, then how much? In that case, in what form should we buy gold – physical gold jewellery, bars, coin, Gold ETF or SGB (Sovereign Gold Bond)? Questions are many. As usual, in many other cases of personal finance, here also the answer is – “It depends”. But it depends on what and how much? Let’s discuss.

First things first – gold itself should not be considered as an asset class, the right asset class in this regard could be ‘commodity’ as a whole. But the awareness and availability of other forms of commodity is still very rare and sparse. So, in that case if we consider gold itself as an asset class, then how it is placed against all other asset classes (e.g. equity, debt, real estate etc.)?

Still in our country, gold is largely bought and kept in physical form and mostly in form of jewellery. It is somehow considered as holy, a part of social custom, an ideal gift on some occasions and above all – a status symbol. In all these cases, gold actually turns out to be a dead asset, as it is never sold neither it results in any sort of income stream. If you ignore the notional value of it and consider the cost of maintaining a locker to keep your physical gold safe, it even results in negative return.

Off late, people started buying gold in digital form, where gold as a unit gets credited in your demat account like shares and bonds. Here, your holding reflects the gold price. So, when you decide to trade, equivalent amount of money gets credited in your bank account. With that money, you can then buy physical gold or spend in whatever way you want.

Sovereign Gold Bond (SGB) tries to address this issue by giving you a regular income stream at the rate of 2.50% (taxable) p.a. payable half-yearly. If you hold the SGB till its maturity i.e. 8 years, then post maturity you need not pay any capital gain tax. After 5th year, you can sell it back to government on the date of interest payout. Anytime you sell it whether back to issuer or to a buyer (as it is tradable in exchange) after 3rd year and before maturity – you end up paying long term capital gain @ 20% with indexation (i.e. inflation factored in). Selling it before 3 years will attract short term capital gain tax as per your tax bracket. Now the question is – should gold be part of your investment portfolio? The answer is – need not be in case of long-term goal-based investing. If your investment horizon is long term and you are overall bullish about India growth story and economy – you can very well keep predominantly equity and some percentages of debt asset.

If your investment horizon is medium term or short term and you are worried about economic downturn, rapid rise of inflation, Indian currency losing purchasing power – then you can very well consider gold as part of your investment portfolio.

But if your purpose is diversifying your portfolio to generate certain benchmark return, keeping 5 – 10% of gold asset in portfolio often proved out to be a good strategy. Of course, in such cases gold must be bought/kept in paper or digital form. Multi-Asset Allocation Mutual Fund schemes also offer a readymade solution in this regard and can be considered.