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Why Should You Go For Gold Bonds?

By Sarbajeet K Sen
Last updated on: November 17, 2023 19:45 IST
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'It is the best avenue for investors who would like to take long-term exposure to gold.'

IMAGE: Kindly note the image has been posted only for representational purposes.
A woman examines a gold necklace at a jewellery showroom ahead of Dhanteras. Photograph: ANI Photo

The options available for purchasing gold have evolved beyond physical gold and jewellery.

Now one can also buy gold in the financial form, such as gold exchange-traded funds (ETFs) and sovereign gold bonds (SGBs).

Price firmness may continue

Besides ritual significance, gold is an important asset class for investment purposes. It has the ability to provide stability to portfolios when the financial markets turn volatile.

Demand for gold is likely to remain high in the near future, ensuring firmness in its price.

"Due to the current uncertainties and associated risks, gold prices are maintaining strong support levels between $1,930 and $1,960 per ounce.

"From a technical standpoint, the projected price targets are $2,030 and $2,060," says Joseph Thomas, head of research, at Emkay Wealth Management.

Gnanasekar Thiagarajan, director-Commtrendz Research, is also bullish.

"We expect gold prices to test $2,400 in the international markets (MCX: Rs 68,000 per 10 grams) due to Fed rates peaking and possible easing in the future.

"Gold may gain further momentum if the uncertain geopolitical climate continues," he says.

Bars and coins

Indian households have traditionally bought and held physical gold, including coins and bars (and jewellery).

Bullion is easy to sell.

"Physical gold is the most preferred avenue for gold investing. However, there are issues of purity, storage costs, and lower resale value that eat into investor returns," says Ghazal Jain, fund manager-alternative investments, Quantum Mutual Fund.

The jewellery option

A lot of people are likely to purchase jewellery for themselves and for gifting. Go for hallmarked jewellery and make sure the jeweller applies a price close to current market rates.

"Jewellery appreciates in value and yields a return, thanks to its underlying gold. But is it a good investment?

"Purity concerns, making charges, retail markups, and lower resale values make this avenue inefficient," says Jain.

While selling jewellery one may see a dent in the realised value. Jewellers may charge a haircut as high as 10 per cent.

SGBs for long-term

SGBs held in demat accounts have gained popularity in recent years. These bonds earn interest at the rate of 2.5 per cent per year. They carry zero default risk.

SGBs are issued at the prevailing price of one gram of gold and pay the prevalent price again at maturity. They have a tenure of eight years. Capital gains are tax-free at maturity.

SGBs are listed on the stock exchanges but they may not always trade near fair value.

"SGBs pay annual interest, are tax-efficient, but tend to have low secondary market liquidity resulting in price inefficiencies," says Jain.

SGB investors should be prepared to hold them till maturity.

"It is the best avenue for investors who would like to take long-term exposure to gold," says Thomas.

Gold ETFs offer liquidity

ETFs make sense for investors looking to invest in gold in the medium term.

"Gold ETFs saw inflows of Rs 1,659.5 crores (Rs 16.59 billion) in the September 2023 quarter and are one of the leading digital gold avenues. They invest in physical gold of the highest purity and aim to track the domestic price of gold.

"One can invest in denominations as low as 0.01 gram. Mutual fund investors can choose to invest in a gold fund of fund, which in turn invests in gold ETFs," says Jain.

Take limited exposure

While gold has been a rewarding asset class for investors, one should not take excessive exposure to it.

"The exposure should ideally not go beyond 5 to 10 per cent of the portfolio.

"Take into account your risk tolerance while investing. It is relatively stable but can at times be subject to price fluctuations," says Thomas.

Thiagarajan argues for a higher allocation.

"Investors mostly have 10 to 15 per cent in gold. They can hike it to 20 or even 25 per cent if geopolitical tensions escalate," he says.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Ashish Narsale/

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Sarbajeet K Sen
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