Considering the present geopolitical situation across various regions, gold certainly could be a good hedge against volatility in other financial assets such as equities
Gold is traditionally considered a defensive asset, providing a safe haven during economic uncertainty. This sets it apart from growth-oriented assets like equity and real estate. Gold prices are influenced by factors such as central bank holdings, geopolitical tensions, and currency fluctuations.
“For example, recent years have seen central banks worldwide, including in India, significantly increase their gold reserves. This growing demand from central banks and geopolitical events have driven prices up. Despite this, gold’s performance over the long term has not consistently matched that of equity, which has a stronger track record in outpacing inflation,” says Arjun Guha Thakurta, executive director, Anand Rathi Wealth.
“Investing in gold can be a smart choice for NRIs as it acts as a hedge against inflation, a tool for portfolio diversification, and a culturally valued asset. Gold offers stability during economic uncertainties and can preserve wealth over time,” says Sachin Jain, regional CEO, India, World Gold Council.
Considering the present geopolitical situation across various regions, it certainly could be a good hedge against volatility in other financial assets such as equities. “NRIs can choose from various options such as physical gold, gold ETFs, or digital gold, depending on their goals and convenience. They can also hold gold in the form of BDRs in IIBX. While physical gold (jewellery, coins, and bars) has cultural appeal, financial instruments like ETFs and bonds provide better liquidity and eliminate storage concerns,” says Jain.
What To Keep In Mind
NRIs should consider several key factors to ensure they align with their financial goals. “Understanding taxation rules in India and their country of residence, including double taxation treaties, is crucial to avoid unexpected liabilities. Exchange rate fluctuations should be factored in, as gold prices are globally denominated in USD,” says Jain.
However, there is a contrarian view. “If you are an NRI investing in gold, we believe it is a better option to invest in Indian equity funds, which have a higher potential to generate returns and diversify risk. This approach allows you to diversify across categories and market caps. Therefore, the simple factors an NRI investor should consider include the asset allocation ratio in the portfolio,” says Guha Thakurta.
The equity-to-debt ratio should be around 80:20, with market cap allocation such that 55 per cent is in large-cap funds and the rest in small and mid-cap funds. Additionally, diversifying across different categories of mutual funds in the actively managed space is crucial.
So, while exposure to gold is a good idea it should not be more than 10 per cent of one’s portfolio.