Stocks

Gold bonds take sheen off ETFs

Suresh P Iyengar Mumbai | Updated on January 17, 2018

Return 21% since listing on June 13 as against gold exchange traded funds’ 1%

The first tranche of the Gold Bond Scheme (GBS), which was listed on the exchanges late last month, has taken the sheen off other gold saving schemes such as exchange traded funds and mutual fund schemes.

The GBS has gained 21 per cent (since its listing on June 13) to ₹3,216 on Monday, though it closed 6 per cent lower on profit-booking. The first tranche of gold bond was issued at ₹2,682 and the government raised ₹246 crore through 63,000 applications.

Investors selling on the exchange have to pay short-term capital gains tax. These bonds, which are considered part of the Central Government’s borrowing programme, have a maturity of eight years.

Gold ETFs, on the other hand, have returned around 1 per cent in the last one month.

Comes with govt guarantee

While gold ETF sponsors have to back up the fund flow with purchase of physical gold, the government takes the entire price risk of gold in the bond scheme and pays additional interest on the bonds issued through RBI.

Last fiscal, the government raised ₹1,320 crore through three tranches by selling 4,908 kg of gold through the GBS to about 4.50 lakh investors. It decided to list the first tranche of bonds last month for investors who wanted to exit the bond before maturity.

Sudip Bandyopadhyay, Chairman, Inditrade Capital, said there is no meaning in investing in gold ETFs and gold mutual fund schemes anymore with an attractive option of gold bond available.

2.75% interest

“The gold bonds not only capture the appreciation in yellow metal prices but also additional coupon of 2.75 per cent (on issue price) annually, besides being tax-free on redemption at maturity,” he said.

On the other hand, he added, gold ETF and mutual fund investors lose out on coupon and incur additional expense of asset management charges.

Prateek Pant, Head of Products and Solutions, Sanctum Wealth Management, said the gold bond scheme has the potential to attract more investment if the government creates greater awareness among investors.

Though the bond enjoys sovereign guarantee, a mere coupon of 2.75 per cent is not enough to create wealth over the long term. “We usually advice our investors to set aside 5-10 per cent of their portfolio in gold as a sort of hedge,” he said.

Gold prices have the potential to go up in the near future with a series of global events such as the US elections, uncertainty on the impact of Brexit and the US Fed’s plans to increase rate, he added.

Published on July 18, 2016

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