The lure of gold

Have a 10-15 per cent allocation to gold in your portfolio. Since this is an asset class whose value fluctuates quite a lot, build your exposure by investing systematically

After a 20 per cent plus jump in the past year, gold is in the news again. And the noise around it is eerily similar to the ones we hear when the price of any asset class runs up, whether it is equity or real estate or bitcoins. 

But as a rule of thumb, you cannot let your investments be determined by the short-term performance of a specific asset class. I have always maintained that gold should form around 5-10 per cent of the portfolio, depending on the investor's goals and risk profile. Since gold prices fluctuate quite a lot, it is always advisable to build up your investment in gold systematically over time, much like systematic investment plans (SIPs) in equity mutual funds. 

There is a debate on the best possible way to invest in gold. One way is to buy physical gold of appropriate value every month and store it safely. The advantage: You can use it for making jewellery or can encash the value by selling it in the market. But on the other hand, you can never be sure of the purity of the gold. Also, there is a goods and services tax (GST) on the purchase. The biggest disadvantage is that it is not an automatic method. You will need to buy it every month manually, and that means it will be missed a few times. The worst part is that it may never get resumed. 

Another option is to buy sovereign gold bonds (SGB) of specific grammage every month, either from the market or from the issues that come out. The advantage is that you do not pay GST and you also get interest income of around 2.50 per cent a year (taxable) on the SGB. If you hold the bonds till maturity, the capital gains are tax free. These gold bonds can be sold in the market or pledged if you want liquidity. However, you cannot buy a fraction of a bond. The biggest disadvantage: Inability to set up a monthly SIP. Then, there are gold ETFs, a poor cousin of sovereign gold bonds with all the same problems pointed out above, but with none of the advantages of SGB. 

The fourth and the best option for middle-class investors (investing around to Rs 20,000 every month) is a gold mutual fund. Investing a fixed amount every month has its advantages. Similar results can be obtained by investing in digital gold where you can buy gold even for Rs 5, and it is stored with a third party. You can sell it back online any time or take delivery of the actual physical gold. The only issue is that digital gold is not regulated and hence, you carry a counter-party risk. 

The fifth option of gold monetisation scheme (GMS) has been a non-starter for various reasons. The scheme is reportedly undergoing a makeover and may yet emerge as the easiest and most cost-effective way to invest in gold. The government has its work cut out to revamp the GMS to bring out the tonnes of gold that is reportedly held by the various religious bodies in the country. At least, this may stop the haemorrhaging of precious foreign exchange that is spent on buying gold from outside India.

The writer is a Sebi-registered investment advisor