Gold and Silver: Do They Belong in Your Modern Indian Portfolio?

In India, gold is more than a metal; it’s woven into the fabric of our culture. From weddings and festivals to heirlooms passed across generations, our affinity for gold is timeless. But in today’s dynamic financial landscape, does this traditional safe-haven asset still merit a place in a modern investment portfolio?

The answer is a resounding yes. Gold, along with its more volatile cousin silver, can play a crucial role in diversification and risk management. However, the key lies in moving beyond physical ownership to more efficient investment methods.

Key Takeaways:

• Hedge Against Volatility: Gold often performs well when equities decline, making it an excellent tool to protect your portfolio against market crashes and economic uncertainty.
• Modern Investment Avenues: Go beyond physical gold with efficient options like Sovereign Gold Bonds (SGBs), Gold ETFs, and Gold Mutual Funds, each offering distinct advantages.
• Strategic Allocation: Financial experts typically recommend allocating 5-10% of your portfolio to gold to balance risk without compromising long-term growth potential.

Beyond Jewellery: Modern Ways to Invest in Gold

While buying gold jewellery is a cherished tradition, it’s an inefficient investment. High making charges (5-25%), potential purity discrepancies, and storage concerns can significantly erode your returns. Here are smarter, more effective alternatives:

1. Sovereign Gold Bonds (SGBs)

Issued by the RBI on behalf of the government, SGBs are one of the most compelling ways to own gold in paper form.

• Pros:
  • Additional Interest: You earn a fixed interest of 2.5% per year on your initial investment, paid semi-annually.
  • Tax-Free Gains: Capital gains are completely tax-free if you hold the bonds until maturity (8 years).
  • No Hidden Costs: Since it’s a digital certificate, you avoid storage costs and purity concerns.
• Cons:
  • Lock-in Period: SGBs have a maturity of 8 years, with an exit option available after the 5th year, making them less liquid.
  • Limited Availability: SGBs are issued in specific tranches by the RBI and are not available for purchase throughout the year.

2. Gold Exchange Traded Funds (ETFs)

Gold ETFs are funds that hold physical gold as the underlying asset and are traded on stock exchanges like shares. One Gold ETF unit typically represents one gram of 24-carat gold.

• Pros:
  • High Liquidity: You can buy and sell Gold ETFs at any time during market hours.
  • Transparent Pricing: The ETF price closely tracks the real-time price of physical gold.
  • Cost-Effective: Expense ratios for Gold ETFs are relatively low, typically ranging from 0.4% to 1%.
• Cons:
  • Demat Account Required: A Demat and trading account is mandatory for investing in ETFs.
  • Taxable Gains: Capital gains from selling Gold ETFs are subject to tax.
  • No Interest Income: Unlike SGBs, ETFs do not generate any interest.

3. Gold Mutual Funds

These are mutual funds that invest in Gold ETFs, providing an accessible route to gold investment for those without a Demat account.

• Pros:
  • SIP-Friendly: You can invest small, regular amounts through a Systematic Investment Plan (SIP), with some funds allowing investments as low as ₹100.
  • No Demat Needed: An excellent option for investors who are yet to open a Demat account.
• Cons:
  • Higher Expense Ratio: The expense ratio is slightly higher than a direct Gold ETF investment, as it includes the fund management fee of both the mutual fund and the underlying ETF.
  • Potential Tracking Error: Returns might slightly lag the actual gold price due to expenses and tracking errors.

4. Digital Gold

Offered by many fintech platforms and apps, digital gold allows you to buy 24K gold online in minuscule fractions.

• Pros:
  • Micro-Investment: You can start investing with as little as ₹1.
  • 24/7 Accessibility: Buy or sell digital gold at any time of the day.
• Cons:
  • Unregulated Space: The digital gold market is not directly regulated by SEBI or RBI, which introduces a layer of risk.
  • GST and Price Spreads: A 3% GST is levied on every purchase, and a noticeable difference often exists between the buying and selling prices.

Gold’s Role as a Portfolio Stabiliser

Gold has a low or inverse correlation with equities. This means that during periods of economic distress, high inflation, or stock market downturns, gold prices often rise as investors seek it out as a “safe-haven” asset.

• During Market Crashes: In the 2008 global financial crisis and again during the COVID-19 pandemic, gold prices surged while equity markets plummeted.
• Against Inflation: Gold is widely regarded as a reliable hedge against inflation. As the purchasing power of currencies like the rupee erodes, the value of gold tends to appreciate.

However, during extended bull markets, gold may underperform equities. This is why it should act as a portfolio diversifier, not its core component.

Silver: The Industrial Metal with Higher Risk and Reward

Often called “poor man’s gold,” silver possesses distinct characteristics that set it apart.

• Industrial Demand: Over 50% of silver’s demand stems from industrial applications like solar panels, electronics, and 5G technology. This makes its price highly sensitive to the business cycle and economic growth.
• Higher Volatility: Due to its dual role as a precious metal and an industrial commodity, silver prices are generally more volatile than gold prices.
• Investment Options: You can invest in silver through physical bars and coins or, more conveniently, through Silver ETFs, which function just like Gold ETFs.

For investors, silver can be a strategic bet on industrial growth, but its volatility means it should form a smaller part of the portfolio, used for further diversification.

Understanding Gold’s Limitations

Despite its benefits, gold is not a flawless investment. It’s crucial to recognise its drawbacks:

• No Regular Income: Unlike dividend-paying stocks or interest-bearing bonds, gold generates no income. Returns are entirely dependent on price appreciation.
• Long Stagnant Periods: Gold prices can remain flat for years, potentially leading to lower long-term returns compared to equities.
• Opportunity Cost: Over-allocating to gold during a strong stock market bull run could mean missing out on significant growth opportunities elsewhere.

The Verdict: A Strategic Role for Precious Metals

For Indian investors, gold and silver are more than just commodities; they are a part of our financial DNA. In a modern portfolio, they serve as a vital insurance policy. An allocation of 5-10% in precious metals can provide a crucial hedge against stock market volatility, economic crises, and currency depreciation.

The key is to choose the right investment vehicle. For long-term, tax-efficient goals, SGBs are an outstanding choice. For liquidity and ease of trading, Gold ETFs are ideal. By understanding the unique roles of gold and silver, you can build a more resilient and well-rounded portfolio prepared for any economic season.

This article is for informational purposes only and does not constitute investment advice. Please conduct your own research before making any investment decisions.