Investing in gold? Choose your instrument carefully
Gold has crossed the $3,300 mark in the international markets and is hovering around the Rs 95,000 level, a fresh high, in domestic markets, triggering a renewed focus on its role in retail investors’ portfolios.
According to investment experts, gold’s shimmer is here to say – and could possibly brighten further in the days to come. “Gold has run up by 40 percent in the last one year and it is likely to continue… whenever there’s uncertainty, gold is the best bet as it is considered a safe haven asset,” says Navneet Damani, Head of Research – Commodities, Motilal Oswal Financial Services.
Ongoing tariff wars as well as the uncertain global economic and geopolitical scenarios have driven the bulk of the surge of late. Its glittering run over time has been aided by accumulation of gold reserves by central banks across the globe, inflation concerns and rising demand after the pandemic.
Goldman Sachs raised its end-2025 gold price forecast to $3,700 per ounce from $3,300, with a projected range of $3,650-$3,950, citing stronger-than-expected demand from central banks and higher exchange-traded fund inflows due to recession risks.
Irrespective of gold’s trajectory, financial experts feel retail investors’ approach towards gold should be based on their asset allocation. “If the proportion has increased due to falling equities and a rise in gold prices, then you can look at rebalancing. There are plenty of uncertainties still, so there is room to rebalance, though not for outright selling,” says Mehta. “On the other hand, if your allocation is lower, you can consider increasing your allocation to gold to 10-15 percent of your portfolio over a period of 6-12 months. Track volatility and increase your allocation by buying on dips.”
If you are looking to increase your allocation to gold, here are some avenues that you can consider:
Listed SGBs
Starting in 2015, the RBI has launched 67 SGB tranches, issuing 14.7 crore units. They are listed and traded in the cash segment of the BSE and NSE. Retail investors can buy and sell them through demat accounts. “Sovereign gold bonds are ideal, but no new bond issuances are coming up. Over a period of time, you will see them vanishing. It is very clear that there will be early redemptions,” says Harshad Chetanwala, Co-founder, MyWealthGrowth, an investment advisory firm.
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SGBs are eight-year instruments with a five-year lock-in. Although SGBs are listed on the stock exchanges, most of them are thinly traded. However, the RBI provides a buyback facility at the end of the fifth, sixth and seventh years.
Unitholders can submit their redemption requests during the designated windows through Receiving Offices, NSDL, CDSL, or RBI Retail Direct.
Also read: Gold crosses Rs 95,000 for the first time: Should you buy, sell or hold?
Gold ETFs
The main goal of a gold ETF is to track the domestic physical gold prices. In short, they are based on gold prices and invest in physical bullion. Gold ETFs are units representing physical gold. One gold ETF unit equals 1 gram of gold, backed by high-purity physical gold.
Since gold ETFs are listed, they are quite safe and have higher liquidity. However, there are brokerage charges, but way less than making charges in terms of physical gold or jewellery. Also, the expense ratio in gold ETFs is lower than that of gold MFs.
Keep in mind that ETFs track the price of gold, so they are subject to volatility. Also, to invest in an ETF, one needs to have a demat account. There are entry and exit loads, and the investor has to pay brokerage every time.
Gold mutual funds
Gold MFs are open-ended funds that invest in units of Gold ETF. The ultimate goal of the mutual fund is to create wealth using the potential of gold as a commodity. Each gold MF has a fund manager who makes investment decisions as per the fund objective. “Most gold instruments are at par now. Sovereign gold bonds are still available at a 3-4 percent discount on some platforms – so if you are getting them at a reasonable discount, you can buy them. Gold ETFs and physical gold are at par, one could look to buy through these routes as well,” says Damani.
The units of gold MFs are priced differently as compared to ETFs. It is in the form of net asset value (NAV) disclosed at the end of the trading session.
Gold MFs are actively managed, so they have the potential to outperform the gold price over time. They also offer the convenience of investing through a mutual fund house. However, gold mutual funds have higher expense ratios than ETFs, typically around 1-2 percent.
Additionally, they are subject to the risk of underperformance, meaning that they could return less than the gold price over time.
Further, gold MFs have low minimum investment requirements compared to gold ETFs, making them more economically accessible for retail investors. Also, one does not need a demat account to invest in a gold MF.
Also read: 34 SGB issues coming up for premature redemption: Should you redeem or hold?
Physical gold
A favourite with Indians, this remains an attractive avenue but comes with its own set of limitations. “You can look at physical gold too, but it poses challenges from the storage and purity perspectives. When you are looking at investing, you need well-regulated instruments and convenience, which gold ETFs and gold savings funds offer,” says Chetanwala.