Budget 2021

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Budget 2021

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Sovereign gold bonds Series X issue: Should you invest?

The sovereign gold bond (SGB) scheme Series X offers gold at a price of Rs 5,054 per gram for investors using digital modes to pay. But is this the right time to buy gold?

January 14, 2021 / 12:39 AM IST
Representative image

Representative image

The tenth installment (series X) of the Sovereign Gold Bond (SGB) scheme for 2020-21 for subscription opened on Monday. The subscription will end on January 15, 2021. With the yellow metal trading flat on Tuesday at the bullion exchange at Rs 49,298 for 10 grams, investors are mulling on buying the 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 5,104 per gram. 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 5,054 in such cases. 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.

Gold price today: Yellow metal trades flat, Sell on rally towards Rs 49,550

What comprises SGBs?


Issued by the Reserve Bank of India, on behalf of the Union government, SGBs comprise government securities denominated in gold wherein investors are required to pay the issue price in cash.

The minimum permissible amount allowed for investment in SGB is one gram of gold, while the maximum subscription limit for SGBs is 4 kgs for individuals, 4 kgs for HUF, and 20 kgs for trusts and similar entities per fiscal (April-March).

What works?

The investment in SGB is attractive for those investors looking for a long-term view of gold as it provides a window of exit after five years, despite having a full tenure of eight years. As SGB pays interest and there is almost zero cost to hold on to it, it is good deal for investors. For those investors holding the bond till maturity, there is no tax on capital gains. Also, there is no tax deducted at source on interest paid.

What doesn't?

Despite the SGBs are listed on the stock exchange, there is no assurance that they will trade near the fair value. Past trading experiences show listed SGBs have seen increase in average volumes recorded over a period of time. These bonds mostly trade at two to seven percent discount to the prevailing spot prices of gold.

Should you invest?

Last year with COVID-19 pandemic raging, prices of yellow metal appreciated over 38 percent. Meanwhile, experts are of the view that investors can use rallies towards Rs 49,550 could be used to go short as further strength in the dollar index could push both the precious metals lower.

Amid the strong rebound in the dollar index, gold settled on a mixed note in the international markets. However, weak rupee made the yellow metal settle on a positive note in the domestic markets. Experts believe gold prices will reach Rs 65,000-67,000 per 10 grams in the long term.

Some even cite that spending in SGB is an attractive option for long-term investors. Certified Financial Planner Parul Maheshwari in November had said “Given the low liquidity on the exchange, buy SGBs if you are comfortable holding on to them till maturity," adding, "Given the regular interest payout, little expense and tax free gains if held till maturity, SGB is an attractive option for long term investors."

Savvy investors should compare prices of existing SGBs listed on stock exchanges with the new SGB’s price. If they spot discounts in prices, they can buy them on the exchange.

Bottom-line: Investors should not expect past returns to continue. However, 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 January 15, 2021. The previous issue price for the Bonds (Series IX), which were open for subscription at Rs 5,000 per gram of gold from December 28, 2020, to January 1, 2021.
Saurav Mukherjee

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