Going by gold’s current market performance, it sure appears that the bullion is riding low. As of yesterday, August gold contracts on MCX (Multi-commodity exchange) fell 0.4 percent to reach Rs 47,732 per 10 gram. As per today’s IBJA (Indian Bullion and Jewellers Association) rates for 999 purity gold, the metal opened at Rs 48,006 and closed slightly lower at Rs 47,951. Traditionally considered to be a safe investment and an inflationary hedge, gold might be losing its sheen, but gold-based investments continue to remain in demand.
And with the fourth tranche of SGBs (Sovereign Gold Bonds) currently open for subscription, we take a deep dive into understanding various other alternatives and cost-effective routes of investing in gold.
What are Sovereign Gold Bonds? Launched in 2015 under the Gold Monetisation Scheme, SGBs are simply government-backed securities in denominations of 1 gram of gold and further multiples. Consider them as a substitute for physical gold, but you will not have to incur the cost of buying, selling, and tangibly storing bars or coins.
RBI fixes the prices of the issue price for each tranche by calculating the simple average of the closing prices of 999 purity gold as disclosed by IBJA as on the last 3 working days before the week allocated for the subscription.
The scheme, implemented on a yearly basis, is currently in its fourth phase for the financial year 2021-22, with a subscription window of 5 five days, starting 12th July, 21 and ending on 16th July, 21. Here is a complete schedule for the launch of all phases this year:
| Tranche (2021-22) | Subscription Window (2021) | Bond Issuance (2021) |
| Series I | May 17– May 21 | May 25 |
| Series II | May 24–May 28 | June 01 |
| Series III | May 31-June 04 | June 08 |
| Series IV | July 12- July 16 | July 20 |
| Series V | August 9-August 13 | August 17 |
| Series VI | August 30-September 2 | September 07 |
For the ongoing phase (Series IV) of the SGB subscription, the issue price has been set at Rs 4,807/ gram of gold. As an individual investor, your holdings cannot exceed 4 kilograms. Similarly, the investment limit cannot exceed 20 kgs for trusts and other government-notified entities. Investors will earn an interest of 2.5 percent per annum on the nominal value of the bond on a half-yearly basis, and for those applying online, a discount of Rs 50/gram will also be applicable.
Past Performance With a maturity period of 8 years and an exit option post 5 years to ease liquidity concerns, the first tranche of SGBs, issued in November 2015 at a price of Rs 2,684/unit was opened for early redemption in May this year, at a price of Rs 4,837/unit.
This means that the investors ended up gaining more than 80 percent over the original price, at a CAGR (Compounded Annual Growth Rate) of 12.5%. However, the exit can only be exercised on interest payment dates, which are set bi-annually.
“There is a long-term capital gain (post 3 years) on redemption of SGB, which is exempt from taxation as per provisions of section 47 of the Income Tax Act, 1961. This is a huge relief as the sale of physical gold can attract tax as high as 20%, excluding surcharge and cess”, said Punjab-based Chartered Accountant and Tax Associate Bhavesh Jindal.
However, BSE faculty Anil Upadhyaya, discounts SGBs as investment vehicles, given the mere 2.5 percent return generation it offers and high dependence of gold prices on international political and financial stability, which cannot be determined with certainty for the next 5-6 years.
“Since gold is a safe haven in terms of investment, people rush towards buying gilt and gilt-related assets in times of political or financial turmoil. SGBs offer a fixed return of 2.5 percent, over and above the corresponding appreciation of gold prices during the period. And if we were to match or exceed the returns of a bank FD, which is presently at 5.5 percent, we can comfortably assume that gold must appreciate at least 3 percent per year. And post-Covid vaccination rollout globally and relative simmering down of international conflicts in the Biden era, the outlook on the growth of gold cannot be realistically predicted as going only upwards”, he explained.
Retail Direct Gilt Account In an attempt to bring investments in government securities a step closer to retail investors, RBI also recently launched the facility of directly opening RDG (Retail Direct Gilt) accounts with the apex faculty. This will allow investors to access both primary and secondary market issuance of various government securities, namely Government of India Treasury bills, dated securities, sovereign gold bonds, and state development loans. There will be no charges on account maintenance, while pledges and liens on securities stored in the account will also be possible, with a maximum of 2 nominations per account allowed.
Gilt Funds and ETFs Another preferred avenue of investing in gold is to take the mutual fund and ETF route i.e. by putting money in Gilt funds, which invest in medium to long term, low-risk government securities, and Gold ETFs, which track the domestic gold price and mirror the same for return generation.
But considering the recent trends, both gilt funds and gilt funds (10-year constant duration) have been seeing a consistent outflow for the present year, with Gold ETFs witnessing a stable inflow, despite negative returns on the asset class. Reports suggest that the domestic prices of gold have corrected about 4 percent in the ongoing year.
| Investment Vehicle | Net Inflows/Outflows (Jan-March 2021)(Rs Crore) | Net Inflows/Outflows (June 2021)(Rs Crore) | 5-year returns (In percent) | 10-year returns (In percent) |
| Gilt Fund | (2,194) | (538) | 7.67 | 8.57 |
| Gilt Fund (10-year constant duration) | (74.15) | (24.36) | 8.57 | 9.61 |
| Gold ETFs | 1,778 | 359 | 7.16 * | 6.55* |
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