By Vaibhav Jain

In the world of investments, one term is paramount – diversification. It’s a strategy that’s been tried and tested, celebrated by experts and novices alike. But what’s it all about, and how does gold fit into the equation? Let’s dive into the world of investment diversification and discover how gold can play a vital role.

There are various asset classes to choose from, each comes with its unique risk and return profile. These asset classes include equities, fixed income, real estate, and the ever-shining star, gold, amongst others. The rule of thumb is simple: the higher the risk, the greater the potential for higher returns.

Gold, a tangible asset, has intrigued investors for centuries. Its allure extends beyond financial gains, as many Indian households, especially the women, have a soft spot for gold jewelry. But when it comes to optimizing your portfolio, how much gold should you hold?

While experts often suggest a 5-10% allocation to gold in your investment portfolio, I decided to delve into historical data to uncover if there exists an ‘ideal’ gold allocation in our portfolio.

Readers should note that the ‘ideal’ allocation can vary significantly depending on the risk profile of the investors, as well as the timeframe you consider. Assuming we are talking about a balanced risk profile here, our 20-year analysis suggests an allocation of 20-25% to gold resulting in best returns per unit of risk (as measured by standard deviation), while a 15-year view points to an allocation of around 10-15%. This dynamic range underscores that there is no fixed percentage for gold allocation; it largely hinges on when you embark on your investment journey and your risk profile.

What’s crucial to note is that gold exhibits a generally negative to non-existent correlation with equities. The chart below illustrates that during periods when equity markets, as measured by Nifty 50, experienced declines, gold often delivered positive returns. In simpler terms, when equities dip, reallocating or increasing your gold allocation can be a wise move.

While long term returns from gold might not be as high as equities, it really helps in reducing portfolio risk and encompasses its role as a safe-haven asset during economic and geopolitical uncertainties. It serves as a historical safeguard against inflation that preserves our investments’ purchasing power, and its capacity to retain value owing to its inherent scarcity.

Should Gold held in physical form be part of the investment corpus to calculate allocation?

Many individuals ask whether they should consider their physical gold as their investments and calculate their allocation accordingly. The answer is simple: it depends on the objective behind holding gold. If it’s for events like weddings or personal adornment or passing through generations, then this is not an investment and should not be included in your asset allocation.

Which avenue should you choose to invest in Gold?

For those looking to add gold to their investments, there are various avenues to explore. You can opt for Gold Exchange-Traded Funds (ETFs), Gold Funds, or consider Sovereign Gold Bonds.

Here’s a quick hack to choose the right avenue based on your objectives:

Investment TypeWhen the core objective isBenefits of these Investments
Sovereign Gold BondsTo invest in lump sum, over a long period of timeTax benefits, including exemption from capital gains tax if held until maturity
Earn interest on invested amount
Gold FundsTo set up an SIP in goldAllow investors to invest in smaller, manageable amounts at regular intervals without the hassle of timing the gold price movements
Gold Exchange-Traded Funds (ETFs)To benefit from short to medium term price movement Allow traders who thrive on short to medium-term gold price movements to time it for quick returns, and also for investors to add on dips and hold the investments in demat form

For those who prefer tangible gold, can consider physical gold from jewelers or banks. Just be mindful of storage and security.

This Dhanteras, as you contemplate adding gold to your investments, remember that gold can be a valuable asset in your portfolio, provided you allocate it wisely. Your financial journey is unique, and finding the right balance among different asset classes, including gold, is a key step toward achieving your investment goals.

For general educational purposes only and should not be construed as advice.

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, Head of Content & Education, Share.Market (PhonePe Wealth)