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Should you invest in the latest Sovereign Gold Bond issue?

Maulik Madhu BL Research Bureau | Updated on August 28, 2021

Current issue price is lower than before and hence use bonds to up your long-term gold allocation

The latest Sovereign Gold Bond Scheme 2021-22 - Series VI will be open for subscription from August 30 to September 3, 2021. The issue price is ₹4,732 per bond (equivalent to one gram of gold). Those applying online and paying digitally get a discount of ₹50 on the issue price.

SGBs can be bought from banks, designated post offices, stockbrokers and the NSE and the BSE.

Why invest

The latest SGB issue price of ₹4,732 is lower by ₹45 to ₹157 per bond than in the preceding five issues in 2021-22. The price is a simple average of the price of gold (999 purity) for the last three business days preceding the subscription period.

Gold prices have fallen around 13 per cent rice (in rupee terms) since the August 2020 high.

Those with a long-term investment horizon can consider buying SGBs in this issue to add to their long-term gold allocation. As of now, no further SGB issues have been announced for this year.

Gold does well when other asset classes such as equity fare poorly and can form part of your portfolio (around 10 per cent) as a hedge against underperformance in other assets.

Given that returns from gold can be lumpy – long periods of poor return followed by short periods of high return – having a longer holding period helps. Over the last 30 years, gold has offered an average 5-year return (CAGR) of 9.4 per cent with the possibility of these returns being negative 13 per cent of the time.

Over the same period, the average 7-year gold return (CAGR) has been 9.7 per cent with the possibility of negative returns being only 1 per cent.

However, investors are advised to keep some powder dry for possible future tranches, which may come at lower prices.

Fears of the US Fed unwinding its ultra-loose monetary policy to rein in inflation have been weighing on gold.

The brass tacks

You can buy a minimum of 1 gram and up to a maximum of 4 kilograms during a financial year.

The limit includes bonds bought in the primary issues as well as those from the secondary market.

The investment tenure of these bonds is eight years. However, early redemption with the RBI is allowed from the fifth year. Both interest and redemption proceeds will be credited to the bank account provided by you at the time of buying the bond.

For this, you can approach the concerned bank or whoever you bought them from, 30 days before the coupon payment date (half-yearly). Request for premature redemption will be accepted only if you approach the concerned bank/post office at least 1 day before the coupon payment date. While you can also sell the SGBs in the secondary market any time before maturity, the lack of adequate trading volumes can be an impediment.

If interested in a more liquid option, consider gold ETFs that can be bought/sold anytime. However, gold ETFs involve an expense ratio while there is no purchase cost for SGBs. ETFs are also subject to capital gains tax, while capital gains on SGBs are tax exempt in certain cases.

Returns and taxation

Apart from the possibility of capital gains (appreciation in gold price between the time of purchase and redemption), SGBs offer investors interest of 2.5 per cent per annum (paid semi-annually) on their initial investment. The interest income is taxed at your relevant slab rate.

If you hold the bonds until maturity (eight years), then the capital gain, if any, is exempt from tax. Capital gains on SGBs sold prematurely in the secondary market are taxed at an individual’s income tax slab rate, if held for 36 months or less, and at 20 per cent with indexation benefit if held for more than 36 months.

This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

Published on August 28, 2021

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