A reader says,” I wish to diversify 10-15% of my portfolio with gold. I am equally attracted to Sovereign Gold Bonds and Multi-Asset Funds but cannot choose. Can you please help?”
First, let us address if it makes sense to diversify a portfolio with gold. The short answer to this question is one can certainly add 10% to 20% of gold to a long-term investment portfolio. However, there are some caveats to be kept in mind.
The USD-INR exchange rate dominates gold returns in the past. In particular, the exchange rate zoomed up when the economy opened up in the nineties. Gold INR returns recently have been in step with Gold USD because our currency is more stable now.
This can be seen in the rolling return chart below. So, a backtest that shows a with-gold portfolio outperforming should not be taken too seriously as repetition is unlikely – unless the country is in serious trouble.
See Gold Price Movement: USD vs INR for more charts and perspectives. These are the conclusions from our previous backtest:
- There is no harm in doing so, but one must not do it under the assumption that one will do better than a without-gold portfolio.
- An equity+ gilt portfolio has often done just as well without higher volatility.
- The annual rebalancing will require more effort in the with-gold portfolio. Although it may not need to lead to higher taxes, it is certainly a higher effort. Most investors fear rebalancing, fearing the process and tax with just equity and debt. Three asset classes will only make it harder for most.
- Gold INR is significantly more correlated with gold USD now, and the past high returns of gold are unlikely to be seen again.
- If equity is an asset class driven by optimism, gold is often driven by pessimism and fear. During extended bull markets, gold can go through years of poor returns. So, it would be frustrating to hold it.
- Gold does not always offer a reward commensurate with its risk. See Gold vs Equity (Sensex) 40-year return and risk comparison.
Taking all this into consideration, our recommendation is to avoid standalone gold for long-term goals. However, if you still wish to include a “small amount” of gold in your long-term portfolio, sovereign gold bonds (SGB) are unsuitable. SGB is only useful for buying gold jewellery eight years from now.
This is because they cannot be easily purchased and sold in the secondary market for a price close to the current gold price due to poor liquidity. A gold EFT or gold fund is better (ETF for those comfortable with trading and associated risks and fund for those who prefer a passive approach). This is especially true if your portfolio is already replete with equity funds.
Many readers often ask, “Why should I sell the SGB? I will hold it until maturity, and that way. I don’t have to pay tax as well”. If you start with 10% gold exposure, it will not remain the same. What should one do after a year if the exposure increases to 15% or drops to 6%?
Leave it alone like an untended garden to grow wild because we have satisfied the urge to hold 10% gold (at least initially). Or, like a responsible fund manager of our dreams and goals, reset it back to 10%? After all, we wanted gold for diversification, and the price of diversification is asset rebalancing and associated taxes. Are we ready to pay this price?
The sad truth is most of us are ready to do this. We want the benefit but not the cost. At least for those with young/new equity portfolios, there is such a choice – a multi-asset fund, provided it is one of the dominant funds in your portfolio.
You get “little exposure to gold” (these can hold other commodities like silver and derivatives, too) and don’t have to worry about fluctuating asset weights, rebalancing, or taxes. The only missing aspect would be the frivolous pleasure of regularly looking at gold returns in the portfolio.
It must, however, be noted that not all multi-asset funds are equity-oriented. We recommend using an equity-oriented multi-asset fund in the portfolio as a pure equity fund. Examples are funds from ICICI, Kotak, HDFC, etc. (please check holding history before purchasing).
Related Resources:
Do share this article with your friends using the buttons below.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Podcast: Let’s Get RICH With PATTU! Every single Indian CAN grow their wealth!
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
🔥Now Watch Let’s Get Rich With Pattu தமிழில் (in Tamil)! 🔥
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)
