Gold bond or physical gold: Which is better post demonetisation?

Sarbajeet K SenMoneycontrol

The recent slide in gold may prompt you to think of buying the yellow metal as an investment as the prices may look attractive. Personal finance and commodity experts feel investors seeking to increase their gold holding could wait for the next tranche of the government’s Sovereign Gold Bonds (SGB) instead of opting for buying physical gold.

They feel that besides the element of safety in holding a bond instead of physical gold, SGB features make it a better investment option.

"There is a good chance that the government will introduce another tranche of gold bonds towards the end of December or early January. It is best to wait for the issue and buy the bonds if one is interested in gold. SGB are safer and provide a nominal return,” Hareesh V, Research Head, Geofin Comtrade Ltd said.

The government has until now issued six tranches of SGB which together have collected around Rs 4,100 crore amounting to an equivalent of nearly 14 tonnes of gold.

S Sridharan, Business Head, Financial Planning, Whiteladder Investment, also advises increasing gold holding through SGBs. “I would advise investing in SGBs. Even from a culture or tradition perspective, increasing gold holding through bonds is as good as buying physical gold,” Sridharan said.

The sixth tranche of SGB carried an annual interest of 2.5 percent while the previous tranches had a 2.75 percent payout. The minimum gold that once can buy is 1 gram with a cap of 500 grams on individual investment in a financial year. Furthermore, there is no need to bother about storage. There is no TDS on the interest and there is exemption from capital gains tax on redemption. SGBs have a tenure of 8 years and the minimum period to stay invested is 5 years, after which interest will be paid.

SGB investment certificates can be traded on the exchange. They can also be used as collaterals to procure loan against. The bonds carry a sovereign guarantee on both the gold and the interest.

“Anyone looking at gold as an asset and is open to trading it should invest in SGBs. Remember, you will not get physical gold but will only get a certificate for the amount invested. Also, anyone willing to stay invested for a minimum tenure of 5 years can happily invest in this scheme,” Anil Rego, Founder and CEO, Right Horizons said.

Gold prices have slid from over Rs 31,000 per 10 grams towards September-end to Rs 29,000 levels in the domestic market at present. The reasons attributed the fall has been the recent demonetisation by the government and global factors such as uncertainty on whether US Fed would increase interest rates in its next meet on December 15.