Lokeshwarri SK

The bonds have it

Lokeshwarri S K | Updated on January 22, 2018


Of the three gold schemes, the sovereign gold bond is best

Diwali, prosperity and gold are somehow strongly intertwined in the Indian psyche and the government is trying to make the most of this by timing the launch of its gold schemes with this festival. Investors are being told to invest in sovereign gold bonds or to trade their old and unused gold under the gold monetisation scheme this Diwali instead of buying gold ETFs or gold coins or bars from their neighbourhood jeweller.

Of the two options, the gold bond scheme is a clear winner and is beneficial not just to the investor but to the government as well. These bonds score over gold ETFs — the other popular instrument linked to gold prices — as they also promise a fixed coupon rate of 2.75 per cent, besides giving returns linked to gold prices. Unlike the gold monetisation scheme that is restricted to those holding physical gold, these bonds can be purchased for cash and are also available in low denominations making them suitable for smaller investors. The most attractive feature of the gold bonds is the sovereign guarantee that comes with it, making it one of the least risky instruments in the market.

The funds garnered through the gold bonds will help meet part of government’s funding requirements. While the government had so far been tapping banks and institutions in its market borrowing programme, the sovereign gold bonds offer an easy avenue to garner funds from the common man. The cost of these funds, at 2.75 per cent, is also going to be far lower than the over 7 per cent the government pays for money raised through G-secs. The government will, however, have to bear the additional cost of hedging these funds to cover the risk arising from adverse movement in gold prices or the rupee. Despite the relative attractiveness of the product, few investors are currently aware of it. The sales channels also appear unprepared to sell the bonds, despite the commencement of the offer period.

Senior Deputy Editor and Head of Research

Published on November 09, 2015

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