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Sovereign gold bonds Series VIII issue: Should you invest?

The sovereign gold bond (SGB) scheme Series VIII offers gold at a price of Rs 5,127 per gram if investors pay using digital modes. But is this the right time to buy gold?

November 11, 2020 / 05:38 PM IST

The Series VIII of the sovereign gold bond (SGB) scheme has come at a tricky time. Gold has given a return of 30 percent over the past two years. But gold prices fell in August and have been subdued since. However, after the Presidential election in the US, gold prices are back in action. In the domestic market, the demand for gold jewellery and bullion is expected increase during the festive season. In the past few years, many investors have started buying gold through the mutual fund and SGB routes. So, are SGBs a good investment option for investors?

What’s on offer

The SGBs will be issued to investors at Rs 5177 per bond. If the investor opts to pay using digital modes, then they get a discount of Rs 50 per bond – the issue price will be Rs 5127 in such cases. The bonds will pay 2.5 percent interest, half-yearly. The bonds will be listed on the stock exchanges. The bond tracks the prices of gold. At the time of maturity, the investor will be paid an amount equivalent to the value of gold then.

What works

SGB is an attractive investment option for those keen on taking a long-term view of gold, as SGB has a tenure of eight years, with an exit option after five years. Since the bond pays interest and there is almost zero cost to hold on to it (compared to half to one percent expense ratio for gold funds), these make sense for investors. If investors hold on till maturity, then there is no tax on capital gains. Also, there is no tax deducted at source on interest paid.


What doesn’t

Though the bonds are listed on the stock exchange, there is no assurance that they will trade near the fair value. Existing listed SGBs have seen increase in average volumes recorded over a period of time. However, they still trade at two to seven percent discount to the prevailing spot prices of gold.

Should you invest?

Gold prices have appreciated over 38 percent in the last one year. The turbulent phase in the global economy is far from over. The COVID-19 pandemic continues to rage, with a second wave of infections in Europe and the US. Central Bankers and governments all over the world are vocal about taking an accommodative stance. Liquidity infusion into the financial system is likely to be heavy. More fiscal stimulus and further reduction in interest rates cannot be ruled out and the same is supportive for gold prices. “A negative interest is not considered as yet by the US Fed, although it has said it will do whatever is needed to support the economy,” says Navneet Damani, Vice President, Motilal Oswal Financial Services.

Even in good times, investors cannot ignore gold in their portfolios. “Gold is a valuable strategic asset in any portfolio as it provides a source of return, has low correlation to major asset classes in both expansionary and recessionary periods, and is a mainstream asset that is as liquid as other financial securities,” says Rajesh Cheruvu, Chief Investment Officer, Validus Wealth.

Damani expects gold prices to reach Rs 65000-67000 per 10 grams in the long term.

If you wish to invest in gold as part of your asset allocation – which you must if you haven’t already – the SGB is a good choice. “Given the low liquidity on the exchange, buy SGBs if you are comfortable holding on to them till maturity,” says Parul Maheshwari, a Certified Financial Planner. “Given the regular interest payout, little expense and tax free gains if held till maturity, SGB is an attractive option for long term investors,” she adds.

However, if you need liquidity, stick to gold exchange traded funds (ETFs). Gold mutual funds too are good options, especially because you can take the SIP route to investments. SGBs don’t facilitate SIPs, as fresh issues may not be available round the year. Gold mutual funds have higher expense ratios compared to those on ETFs.

For savvy investors, there’s one more option. Compare the prices of existing SGBs listed on stock exchanges with the new SGB’s price. If you spot discounts in prices, you can buy them on the exchange.

Bottom-line: Do not expect past returns to continue. But gold is an important asset in your portfolio at all times. Keep an allocation of 5-10 percent of your portfolio in gold.

The issue is open and closes for subscription on November 13.
Nikhil Walavalkar
first published: Nov 11, 2020 11:32 am
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