For investors, gold mutual funds are a better option than sovereign gold bonds

The new issue of Sovereign Gold Bonds (SGBs) will open on 12 July at ₹4,807 per gram. SGBs are an excellent product for gold buyers. But for investors, it may not make much sense.

"Investors who have a portfolio with an allocation to different asset classes should avoid SGBs. They should look at either gold exchange-traded funds (ETFs) or gold funds," said Malhar Majumder, a Kolkata-based mutual fund distributor and partner, Positive Vibes.

According to Majumder, it's easier for investors to maintain asset allocation using gold mutual funds than SGBs. "Suppose investors want to rebalance portfolios because gold prices have run-up. They want to reduce the asset allocation to the precious metal. In the case of SGBs, they would need to them in the secondary market. The secondary market has its problems - it's not liquid. Investors could end up selling at a loss. Gold ETFs and gold bonds are more efficient when it comes to portfolio rebalancing," he said.

According to him, SGBs work for those who want to buy gold in the future for an event like children's weddings. Instead of buying physical gold and storing it in lockers, such individuals can use SGBs. The product will allow them to buy "paper" or "electronic" gold at prevailing prices in small quantities. On maturity of SGBs, close to the event, they can purchase physical gold.

"Buying small quantities of physical gold for son's or daughter's wedding is expensive. If an individual buys jewellery years before the event, the design could be outdated. If someone buys bars or coins, there will be storage costs and making charges. The person will give making charges when buying bars or coins, and also when they are offered in exchange for jewellery," said Majumder.

So, if you are buying gold as portfolio investments, stick to mutual funds. Use SGBs as a replacement for physical gold for a future event.

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