I am a new investor with no exposure to gold. I want to diversify and take some risk for it. What should be my total portfolio allocation for Gold?
– Satyanarayanan
Gold can offer less than flat returns over the long term and then see a very steep bounce, triggered by a global equity risk-off scenario – that is, gold typically delivers when equities are up right. These rallies compensate for the flat returns of the long term. Also, like equities, gold can be volatile.
Depending on the need to diversify your portfolio, you can invest 5-15% in gold. If you are a high-risk investor, you may have a low allocation and vice versa. Make sure your holding period is at least 4-5 years.
You can go for Gold Funds or ETFs – You can use SIP or lump sum. Gold funds are best suited for SIP investments and Gold ETFs for lump sum investments. Funds and ETFs are best suited for strategic allocation based on gold prices. You can also consider Sovereign Gold Bonds for long term gold allocation. These are 8-year bonds that are linked to gold prices, come with a small interest component and the capital gains are tax-free if you hold till maturity.
I have an active SIP going on in Bharat Bond FOF 2030 and SBI Magnum Constant Maturity Fund. Looking at the recent interest rate hike, should I still continue with my SIP?
– Madhav Pandey
You can continue your SIP. However, note that you need a horizon of at least 5-7 years for funds like constant maturity, and Bharat Bond Fund is a target-maturity fund. Longer time frames are needed to allow for volatility due to rate cycles. This period is really good for running SIP at present. Rising rates will cause bond prices to fall, which is reflected in the fund’s NAV. This will provide the average opportunity, and the advantage of buying at the lows (ie, when the returns are higher). You will see less and less negative returns as the cycle moves upwards but you need to be able to hold during this period.
Shrikant Meenakshi is the co-founder of Prime Investor.