The Reserve Bank of India on behalf of the Government of India has announced that the Sovereign Gold Bond Scheme 2023-2024 Series II opens on September 11, 2023, and the price is fixed at Rs 5,923 per gram of gold. For investors making payment through digital means getting an additional discount of Rs 50 per gram which makes the price further attractive at Rs 5,873.
What is on offer?
SGB can be bought by individuals, Hindu Undivided Family (HUF) as well as other investors. The bonds are issued at the price of gold and the minimum permissible investment is one gram of gold. An individual can purchase bonds worth 4 kilogram in a fiscal year. They offer an interest at the rate of 2.5 percent per year payable half-yearly on the nominal value of the bond. These bonds can be held in demat account. At the time of redemption, the investor is paid the then prevailing price of gold. SGBs are listed on the stock exchange. The tenure of these bonds is eight years and after the end of the fifth year, on the dates of interest payment, the investors can opt for premature redemption.
What works?
Since SGB is backed by sovereign guarantee, there is no credit risk. The interest payout makes it even more attractive since gold as an asset class does not offer income. Also, SGBs offer digital exposure to gold which cuts down on issues such as cost of holding, risk of theft, purity issues and costs of safe-keeping and insurance. Investors looking for interim liquidity can also sell these bonds on the stock exchange.
Though the interest paid is taxed in the hands of the investors, the capital appreciation at the time of maturity is tax-exempt. This makes it a boon for long-term investors. If sold after three years but before maturity, then the treatment of long-term capital gains kicks in wherein the investor is expected to pay 20 percent tax post indexation.
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What does not work?
SGBs are considered a less liquid form of gold investment. Though these are listed on the stock exchange, they may not necessarily trade near the fair value. Investors may find it difficult to sell their holdings near fair value on the stock exchange.
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What should you do?
Investing in gold brings diversification to the overall portfolio. Since gold has low co-relation with risky assets such as stocks, in times of volatility the portfolio’s downside can be contained with the help of exposure to gold. Gold is expected to offer returns in line with inflation in the medium to long term. Never chase gold for price performance.
Chirag Mehta, Chief Investment Officer, Quantum Mutual Fund and Ghazal Jain, Fund Manager, Quantum AMC in their September month gold outlook expect gold prices to be rangebound in the near term. “While investors broadly expect the US Federal Reserve to keep rates on hold in September, they have also pushed back bets of interest rate cuts to June 2024. More rate hikes or bets for more rate hikes by the Fed and the growing narrative of a US soft landing will keep a lid on prices in the near term. The downside, meanwhile, seems limited in the wake of worries about Fed overtightening, a potential US recession, rising US debt levels, sticky inflation, central bank gold buying and geopolitical tensions.”
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Gold has done well in the last one year ended September 8, 2023, with 16.2 percent returns. However, after hitting a high of Rs 61,346 per 10-gram mark on May 9, it has corrected to below Rs 59,000 per 10 grams, which may attract many investors. Gold ETFs have seen net inflows of Rs 456 crore and Rs 1,028 crore in July and August 2023 respectively, as per data released by the Association of Mutual Funds in India.
Aamir Makda, Commodity & Currency Analyst, Choice Broking, says, “Since the global inflation scenario is likely to remain stagnant, this will pull the gold price higher in upcoming months.” If the gold prices exceed the high reported in May 2023, then over the next one-two years the momentum may continue, and the gold prices may touch Rs 64,000-68,500 per 10-gram mark, he added.
Tax efficiency
Parul Maheshwari, a Mumbai-based certified financial planner, points out that the SGBs are more tax-efficient for long-term investors. “Capital gains booked in units of gold ETFs and gold funds acquired after April 1, 2023, are taxed as per tax bracket of the investors, making these vehicles tax-inefficient. SGBs, on the other hand, have zero capital gains if held till maturity, hence making them a good bet for investors looking to allocate to gold for their long-term portfolios.”
Savvy investors can also look to purchase the SGBs on the stock exchange. However, while doing so keep a close track of spot gold prices. Many of the traded SGBs are quoting at prices higher than that mentioned in the public issue. If you can buy a few SGBs from the secondary market at a discount to the public issue price, then it can be a good deal provided the residual maturity of those matches with your holding time-frame.
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Exposure to gold should be built gradually and the current dip in gold price can be one such opportunity. Many financial planners advocate allocating 5-10 percent of your money to gold. If you haven’t yet built a sizeable allocation to gold, then it’s a good idea to buy this issue of SGB, given the recent price correction and gold price expectation.
The public issue of SGB Scheme 2023-2024 Series II closes on September 15, 2023.
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