Indians love to buy gold on the occasion of Akshaya Tritiya and the more prudent among those invest in the yellow metal via bonds or funds. The Reserve Bank of India (RBI) has yet to come out with its plans of issuing Sovereign Gold Bonds (SGB) for this fiscal. Last year, the RBI had come out with the SGB issue calendar in April 2020. Ever since SGBs were first launched in November 2015, they’ve been a hit. Investors lapped them up. So far, the RBI has come out with 49 tranches of SGBs and has issued an average of 1.25 tonnes worth of gold in each tranche, in paper or digital forms.
But in the absence of the 2021-22 calendar, you can still buy SGBs from the stock exchanges: BSE and NSE. These are listed and traded in the cash segment along with equity shares. Retail investors can buy and sell them through demat accounts.
Liquidity, the key to buying from the exchanges
SGBs carry a coupon rate and come at a market price when listed on the exchanges. But when buying on exchanges, two more factors matter.
Liquidity plays an important role. For, as much as you’d like to buy SGBs, there must be enough sellers in the market. Of the 49 series of SGBs, 19 have been traded with daily average volume of 100 or more units on the NSE. For instance, the series SGB2020-21 Sr-V (NSE CODE: SGBAUG28V), SGB2020-21 Sr-XII (SGBMR29XII) and SGB2020-21 Sr-IV (SGBJUL28IV) were traded with a daily average volume of 2,468, 656 and 600 units, respectively in the past three months.
However, many SGBs suffer from low liquidity. You may not be able to buy at the market price and would have to settle for a slightly higher price. This difference is called the bid-offer spread or the impact cost – the lower this spread, the better it is for you.
Listed SGBs come with varying tenures
The yield to maturity (YTM) is important if you buy any bond in the secondary market. This gives you an idea how much return you will get if you hold the bond till maturity. YTM is calculated considering the current market price, maturity value and all the future coupon payments.
In SGBs, the maturity value is unknown as the redemption rate will be fixed based on the prevailing (at the time of maturity) closing gold price of 999 purity published by the India Bullion and Jewellers Association (IBJA).
Since YTM is irrelevant in a SGB, you may compare the market price of the SGBs with the price published in the website of the IBJA. Note that gold price of 999 purity published by the IBJA is the reference rate for SGBs.
At times, the market price of the SGBs may be higher or lower to that of the gold price of 999 purity published by the IBJA. Currently, the market prices of many SGBs traded with good liquidity are slightly higher than the IBJA prices, showing higher demand for SGBs. Normally, market dynamics and coupon dates influence the market prices of SGBs.
All the brokers enable buying of SGBs through the exchanges. Earlier, there were operational issues in inter-depository transfer and settlement mechanisms. That has since been resolved. You can buy SGBs with maturities matching with how long you’re willing to stay invested.
Is it good time to buy gold bonds?
While the RBI delays its primary issuance on SGBs – it actually depends on the Government of India’s decision – you can consider buying them on the exchanges. SGBs delivered significant returns over the past one year, thanks to rising gold prices.
After a stupendous rise through 2019 and much of 2020, gold prices fell significantly from their highs.
Chirag Mehta, Senior Fund Manager-Alternative Investments, Quantum AMC says, “Since the start of 2021, gold has been under further pressure on account of the dollar and US bond yields that have strengthened on the expectations that a quick US economic recovery will trigger inflation, as the Federal Reserve insists on keeping interest rates near zero till 2023.”
However, the last one month has seen upward movement in the gold prices.
“With many countries including India currently seeing a resurgence in COVID-19 cases, risk and uncertainty on the pandemic front are back. New waves and variants of the virus are taking a toll on the fragile economic recovery, which could trigger pullbacks in risky assets such as equities. Gold could benefit from the resulting risk aversion, just like it did last year,” adds Mehta.
SGBs outperformed other modes of investing in gold, such as gold ETFs and e-gold, by a wide margin, thanks to the coupon payments that offer additional returns apart from the appreciation in gold price. Gold has been a hedge against market uncertainties. It can form 5-10 per cent of your portfolio at any point of time.
Note that capital gains are tax-exempt only if you buy from the primary issue and hold SGBs till maturity (eight years).
Nakul Kulkarni, Business Analyst at Zerodha, says that “buying SGBs in secondary market and holding till maturity or redemption from secondary market or RBI’s buy back route
will attract a long-term capital gains tax of 20 percent (for holding period of more than 36 months).” But if you sell these bonds before 36 months, then you have to pay short-term capital gains tax at your slab rate. However, tax experts differ on the capital gains tax implication on withdrawal, leaving it open for interpretation.