Gold ETFs Or Bonds: When To Go For Which And Why
Gold is often viewed as a hedge against inflation. What that really means is that the precious metal has for ages served as an effective tool to protect the value of money against inflation or sudden uncertainties in the financial markets. But then why is it often advised that gold should only be one-tenth or one-seventh of a portfolio? Why not put all your surplus funds money in gold at once? That is because gold only sees dramatic price changes during uncertain times and is otherwise a slow-moving instrument, typically more suitable for a risk-averse investor who wants to beat inflation with only slightly better returns than a fixed income security.
Wealth planners say gold should be part of your portfolio only from a long-term perspective. Anyone willing to take bigger risks for bigger returns can instead concentrate on equity-related instruments, they add.
(Also Read: "Gold's Dream Run May Continue")
But which route to take when you're eyeing gold as an investment?
"Within non-physical gold, Sovereign Gold Bonds and gold-linked exchange-traded funds or mutual funds are good instruments "if one wants to invest in gold or diversify the portfolio with gold," says Ravindra Rao, VP-head commodity research at Mumbai-based Kotak Securities.
Sovereign Gold Bonds are government-guaranteed bonds linked to the market price of gold which not only give a gold-linked return, but also a fixed rate of interest. These gold bonds come with a maturity period - or lock-in period - of eight years, with a premature exit only possible after first five years.
(Also Read: Here Is How Sovereign Gold Bond Price Is Calculated)
First launched in 2015, the government's Sovereign Gold Bond scheme is a popular avenue to park funds in non-physical gold, say financial experts.
Gold ETFs, or exchange-traded funds, as the name suggests, are funds secured by physical gold that are traded on bourses like stocks. Any units you purchase appear in your demat account.
Preferring gold ETFs over physical gold serves the investment purpose better, say experts. That is because the money parked is more liquid and more concentrated, saving on taxes, making charges that costs that you would otherwise bear owing to storage of physical gold.
Simply put, owing a unit of gold ETF is cheaper than owning one gram of real gold. This is why wealth planners suggest avoiding physical gold as an investment bet.
(Also Read: How To Invest In Non-Physical Gold)
Gold funds, on the other hand, invest in stocks of companies operating in gold-related services. Although their value responds to changes in the market price of gold, the two are not linked directly. Gold funds are supervised by professional managers, in the same way as mutual funds.
"One should opt for Sovereign Gold Bonds only in a long-term horizon, like 5-8 years or more, as it has a lock-in period. However, if the criteria is liquidity, then ETFs or mutual funds are the best choice," adds Mr Rao.
Wealth planners say gold should not be viewed as a short-term asset, and any investment in the yellow metal should only be made with a long-term outlook.
According to Rahul Agarwal, director at Delhi-based Wealth Discovery, "Those who want to trade in gold for a short-term gain should base their allocation purely on individual risk-appetite and knowledge level... A look at the price trend of gold over a very long period clearly shows that gold is a generational asset."
Investors who want to balance their portfolios from a longer-term perspective can buy the precious metal periodically until their gold allocation reaches 10-15 per cent of overall asset portfolio, he says.
This strategy is not recommended for an average investor, he adds, since immediate-term gold investments are subject to market volatility.
Sovereign Gold Bonds will be available next from November 9 to 13, and four more times - for five days each - till March 2021. Gold ETFs, on the other hand, are available throughout the year as they trade just like stocks.
