Stagger your investments in gold: Go for Gold ETFs or buy sovereign gold bonds in secondary market

As gold prices have hit a new high, touching Rs 65,650 per 10 gram on Thursday, individuals should stagger investments in the metal to lower the average purchasing costs. They should look at gold exchange traded funds (ETFs) or consider buying sovereign gold bonds (SGBs) in the secondary market if they are available at a discounted price.

Gold prices have run up in response to recent US economic data, indicating that inflation continues to progress towards the 2% target and the economy is losing momentum. This is driving market expectations of a rate cut by the Fed sooner.

In the last one year, domestic gold prices have risen 15%. In the last two years and three years, prices have gone up by 25% and 45%, respectively. For a longer five-year period, the price of the metal in the domestic market has doubled. Investing in gold acts as a hedge against inflation and also as an insulation to any global political or economic uncertainties.

Investing in the metal is a time-tested portfolio diversifier and is an ideal store of value in the long term. Ghazal Jain, fund manager, Alternative Investments, Quantum AMC, says, given the current volatility in gold prices investors should look at the metal strategically and consider it as a portfolio diversifier. “Keeping a 10-15% allocation in the portfolio will help to ride out the ups and downs of the markets,” she says and adds that one can expect volatility in prices for the foreseeable future till clarity emerges on the US economic trajectory and Fed policy.

Gold ETFs

Investors should look for gold exchange traded funds (ETFs) with low tracking errors for investing. They are open-ended mutual funds backed by 24-carat physical gold schemes and the returns are benchmarked on the real returns on physical gold, subject to tracking errors. Ideally, investment in gold ETFs should be done in a staggered manner.

Gold ETFs reported net inflows of `997 crore in February driven by investors’ need to diversify their investments as the equity markets are getting expensive. In fact, investing in Gold ETFs score over others due to factors such as transparency, liquidity and nil storage charges.

Sovereign gold bonds

While there is no primary issue of SGBs as the last tranche for the current financial year closed on February 16, investors can buy these bonds from the secondary market if they are available at a discount. As there are few buyers for these bonds in the secondary market, some sellers offer the bonds at a lower price.

Investing in SGBs has several advantages. Investors get a fixed interest rate of 2.5% per annum, disbursed semi-annually. This translates to an effective interest rate of 1.25% for each payment, subject to taxation according to the investor’s income tax bracket. The government guarantee on the principal investment provides security for SGBs.

Abhijit Roy, CEO, GoldenPi, an online investment platform, says, when combined with a SIP-like strategy, SGBs offer a disciplined and tax-efficient way to invest in gold. “SGBs combine fixed income benefits with capital appreciation in a safe, government-backed structure, all without the need for ongoing management fees or making charges,” he says.