A better way to invest in gold

Summary: SEBI’s recent warning on ‘digital gold’ has unsettled many investors who assumed the product was as safe as buying the metal itself. The message, however, isn’t anti-gold—it’s a reminder that how you buy gold matters as much as why. Gold remains a crucial stabiliser in long-term portfolios, but not every route offers the same protection, cost structure or regulatory oversight. This article breaks down gold’s role in smoothing returns and explains why, in today’s environment, there may be a cleaner and more reliable way to hold the metal.

In early November, markets regulator SEBI issued a cautionary note warning that the ‘digital gold’ being sold on popular apps is outside its regulatory purview, meaning investors have no protection if something goes wrong. For a product marketed as safe and convenient, this was a clear wake-up call. At the same time, it should not be seen as an endorsement against the yellow metal. Gold, as an asset, still plays a crucial role in long-term portfolios. SEBI’s message is simply this: how you buy gold matters just as much as why you buy it. And this is exactly where gold ETFs come in.

But before that, let’s first see what makes the precious metal necessary for a well-rounded portfolio.

Why investors need gold in their portfolio

Gold has always been viewed as a hedge, a safety valve that behaves differently from equities during turbulent phases. But the real value of gold becomes obvious only when we look at long periods of data, and especially when we compare its cycles against equity returns.

The ‘See-Saw cycles’ graph presents the five-year monthly rolling returns of domestic gold and the Nifty 500 TRI since 2010. The trend is striking. During years when equities went through stress: 2011 to 2013, 2015 to 2016, late 2018 and the early months of Covid, gold returns began to climb. When stocks were falling, gold was strengthening. And when equities rallied strongly, gold cooled off.

This natural, almost rhythmic see-saw between the two asset classes is what makes gold an important portfolio ingredient. Equities fuel growth; gold provides stability. One steps up when the other stumbles.

How gold stabilises long-term returns

The graph, ‘Gold as a defence against volatility’, offers another important insight for long-term savers. It tracks the five-year monthly rolling SIP returns of three portfolios – 100 per cent equity, a 50:50 equity–gold mix and 100 per cent gold, starting from January 2010. What stands out immediately is how gold helps create a smoother return path. The pure equity portfolio shows wide swings over time, rising sharply in strong market phases but falling just as sharply during periods of stress. In contrast, the portfolios that include gold show a noticeably tighter band of outcomes.

This happens because gold and equity rarely move in the same direction at the same time. During phases such as the 2011-13 slowdown, the 2015 correction, the period before Covid and the Covid crash itself, equity returns dropped significantly. Gold, however, held firm or moved up, limiting the extent of decline in the blended portfolio. When this pattern repeats across cycles, the long-term effect is a steadier and more predictable range of returns.

The 50:50 portfolio thus avoids the deep troughs seen in pure equity, while the gold-heavy portfolio smoothens the curve even further. For investors relying on SIPs, this stability matters because it reduces emotional stress and helps them stay invested through market ups and downs.

What is the best way to invest in gold?

With the SEBI warning fresh in mind, it becomes important to understand the different ways investors can hold gold and the trade-offs attached to each. The goal is not to dismiss any option outright, but to recognise the costs, risks and practical limitations before choosing what suits you.

Physical gold remains the most traditional route, but also the most expensive. Jewellery is rarely 24K, so you get less pure gold, making charges of 8-25 per cent inflate the final price, and you pay a non-recoverable 3 per cent GST. When you sell, jewellers usually deduct another 2–5 per cent, which reduces your overall return. Coins and bars avoid making charges, but GST and storage-related costs remain.

Digital gold offers convenience and the ability to buy tiny quantities, but it operates outside SEBI’s regulatory framework. Investors depend entirely on the seller’s credibility, face counterparty risk and have no standardisation around purity, vaulting or insurance. It also attracts 3 per cent GST upfront and carries a 2-5 per cent spread between buy and sell prices, making it relatively expensive over time.

Sovereign gold bonds (SGBs) have historically been excellent long-term products. They track gold prices, pay 2.5 per cent annual interest and if held to maturity, the gains are tax-free. But new issuances have stopped; there have been no fresh tranches recently. Existing SGBs must be bought in the secondary market, often at premiums over the underlying gold value, and liquidity can be limited for larger transactions.

Gold ETFs, meanwhile, address many of the practical challenges of the other options. They are fully regulated by SEBI, held securely in your demat account and priced transparently. There is no GST on purchase, no making charges, no storage risk and no ambiguity around purity. They can be bought or sold easily through a stock exchange, and their costs tend to be lower than those associated with physical or digital gold.

Each option has its own benefits, but when you compare transparency, regulation, liquidity and long-term cost efficiency, Gold ETFs offer more advantages for most investors looking for straightforward, reliable gold exposure.

To sum up

Gold remains an essential part of a balanced portfolio, not for the highest returns but for the stability it provides. It rises when equities fall, cushions volatility and helps investors stay disciplined during market stress. However, how you buy gold matters: physical gold is costly, digital gold is unregulated and sovereign gold bonds are no longer issued and now trade at premiums. Gold ETFs, instead, offer a clean, liquid, regulated and low-cost way to benefit from gold.

If you're looking to build a diversified, well-balanced portfolio, Value Research Fund Advisor can guide you with personalised fund recommendations based on your goals and risk profile.

This article was originally published on December 01, 2025.