Gold, which is both an investment, a reserve asset and a luxury item and is also used in the technology sector, benefits from a variety of demand. It is highly liquid, is not a financial liability of anyone, carries no credit risk, is in short supply and retains its value over time.
Investing a portion of your portfolio in gold has undoubted advantages in terms of optimizing the return/risk ratio.
In particular, the metal has a negative correlation with the global stock market. For this reason, a line of thought known as a “permanent portfolio” recommends equitable weighting of gold and stocks in the portfolio.
We do not share this extremism, however diversifying your investments thanks to the inclusion of a share of investment in gold bonds in India is a wise choice to make.
Gold and financial crisis
Gold is considered the ultimate safe haven asset. In particular, it is significantly appreciated during the most acute phases of financial crises.
Although not entirely devoid of them, investment in gold funds pose less risk than stocks. Their return being determined with more certainty, it cannot be so high.
What is a bond?
Bonds are generally issued by companies and banks. In the case of sovereign bonds, they generally bear the name of government/sovereign.
In the case of bonds, the investor lends money to the company/government, which in exchange issues a debt instrument, a sort of acknowledgment of the loan. The debt instrument is called an obligation.
The annual maturity, the final maturity and the annual return are defined at the time of the investment. Therein lies the main difference with actions.
Difference from stocks
Shares, each of which constitutes a part of the company, can be bought. The stock is a purchased fraction of the business. In the case of bonds, the investor lends funds to the company or government.
The shares also have no annual or final maturity. The investor only recovers his funds (plus any capital gain) when he sells the shares.
However, stocks can generate annual income as well: dividends. Dividends are distributed by the company which decides to share its profits with its shareholders. While the bond investor is sure to receive an annual return, the distribution of dividends is subject to the decision of the board of directors.
Another key difference is volatility. Equities react much more “violently” to developments – in either direction – in financial markets. The reaction of bonds is less sensitive, since their yield is generally known.
Ideal portfolio diversification tool
Bonds have the advantage of being not only safer than equities, but also of contributing to portfolio diversification. The investor must imperatively avoid putting all his eggs in the same basket. A healthy portfolio allocation requires holding gold investment schemes.
Why? Basically because bonds tend to move in the opposite direction of stocks. If equities give way, bonds will in principle gain, and vice versa.
If you are looking to invest in SGBs (Sovereign Gold Bonds), then the ideal option for you to start investing in the right manner is to consult experts in the field.