Investing in Sovereign Gold Bonds: A Better Alternative to Physical Gold

Gold has proven to be a volatile investment. Rather than allocating a large portion of your portfolio to it, consider keeping your investment in gold under 10% of your overall investments. This strategic approach can help mitigate the risks associated with volatility, especially in a climate where other assets exhibit more stability.

The Role of Gold in Investments

In India, the government has imposed a customs duty on gold imports, reflecting its preference for other investment options like equity. Unlike gold, equity and fixed income products are designed to generate wealth, producing tangible returns that outpace inflation. Historically, gold has underperformed compared to other investment assets, failing to match the growth and diversification potential of equity and fixed income products.

Over the past ten years, the returns on gold have been meager, barely keeping up with inflation. This trend is likely to continue due to the nature of gold, which is a non-productive asset that does not generate wealth but instead stores value based on speculation about future prices.

Gold's Performance and Long-Term Prospects

On March 23, 2023, over the last ten years, the average return on Flexi-Cap Funds was 14.6%, Short-Duration Funds saw a 7.7% return, and Gold Funds yielded a paltry 5.9%. These returns highlight the underwhelming performance of gold compared to other investment options. Over the long term, the Indian market index, Sensex, grew 600 times from 100 points in 1979 to 60,000 in 2022, while gold prices increased 30.6 times from Rs 1,800 per 10 grams to Rs 55,000. Despite the seemingly impressive growth of gold, the lack of genuine economic growth makes it a poor choice for long-term wealth creation.

Sovereign Gold Bonds: A Safer Investment Option

In India, there are two types of non-physical gold investments: Gold ETFs, Gold Funds, and Sovereign Gold Bonds (SGBs) issued by the Reserve Bank of India (RBI). Until 2015, when SGBs were introduced, ETFs and Gold Funds were the best way to invest in paper gold. However, SGBs are now the preferred choice due to their numerous advantages, including lower transaction costs, tax benefits, and guaranteed returns.

Comparing Returns and Features

Compared to physical gold, SGBs offer a higher post-tax return, with an average of 10% annually. Physical gold yields around 6.8%, and Gold ETFs provide a return of 5.9% post-tax. An added benefit of SGBs is the interest rate of 2.5% per annum and the non-taxation of capital gains if sold after the maturity period of 8 years. These benefits make SGBs a more attractive investment option when compared to owning physical gold.

Practical Considerations for Investing in SGBs

When considering SGBs, keep the following points in mind:

Do not treat SGBs as a wealth-generating investment. They are more of a store of value rather than an asset that creates substantial wealth over the long term. You can purchase SGBs at a discount on the stock exchange. For instance, the market price of one gram of 24-carat gold on April 6, 2023, was available at a discounted price of Rs 5,605 (2028 Tranche VI cost) compared to the market price of Rs 6,062. Liquidity is key—buy a tranche that is easily tradable to avoid having to sell at a discount. Ensure your purchase price is below the issue price at which the RBI launched the SGB tranche. Do not forget to add a nominee to secure your investment.

Investment Options to Consider

For those interested in non-physical gold investments, here are some examples of gold funds and ETFs to consider:

HDFC Gold Fund SBI Gold Fund HDFC Gold ETF ICICI Prudential Gold ETF

Investing wisely in sovereign gold bonds or gold funds and ETFs can offer greater stability and more consistent returns compared to the inherent risks of physical gold investments.