Due Diligence . How do you sell your sovereign gold bonds?

Gold as an asset class is once again in the spotlight. Amid the pandemic-led market meltdown, the Nifty 50 TRI plummeted 21 per cent, while gold in rupee terms gained 17 per cent year-to-date. Gold-oriented financial investment products such as sovereign gold bonds (SGBs), gold ETFs and e-gold followed suit, delivering handsome returns.

Investors who parked their money in SGBs, which have been issued over the past five years, have been making huge gains. For instance, the money invested in the first ever issue, SGB-2015-Series-I, launched in November 2015, has appreciated about 84 per cent so far (as on April 27). Similarly, the SGB 2019-20-Series-I, which was launched in June 2019, has gained around 48 per cent.

Is it the right time to sell?

History shows that gold has not been an outperformer across market cycles. But its safe haven status makes it the preferred choice during market and economic meltdowns. At any point in time, 5-10 per cent of your portfolio can be in gold.

The appreciation of gold prices since mid-2019 can be attributed to the US-China trade war, economic uncertainties and fears of global recession. Given the possibility that economic distress could continue to 2021, coupled with debasement of all currencies due to actions of central banks, and inferior performance of peer financial assets, gold prices can remain on an upward trajectory for now.

Investors should ideally be holding on to their SGB investments at this juncture. But if they need funds to meet exigencies caused by the lockdown, they can book partial profit.

The options to liquidate the units of SGBs are limited at present. One can consider exiting through the secondary market or the RBI’s buyback window.

Secondary market route

A total of 37 series of SGBs issued since November 2015 are listed and traded in the cash segment on the BSE and the NSE. A trading account and a demat account are mandatory for buying and selling SGB units in the secondary market.

Liquidity or the trading volume is important if you want to sell or buy SGB units in the secondary market. Ample liquidity enables buying and selling of the units at the desired price. But most SGBs are thinly traded. The average daily total volume traded in all the SGBs on the NSE over the last year was only ₹1.2 crore.

However, the volume is higher in some bonds. Of 37 series, 12 were traded with a daily average volume of 100 or more units over the past three months on the NSE. The series with NSE codes of SGBAUG27, SGBNOV24, SGBAUG24, SGBMAY25 and SGBSEP24 were traded with daily average volumes of 801, 747, 634, 425 and 340 units, respectively, in the last three months. However, these series were not seen traded with a high volume every day. For instance, over the past year, the SGBSEP24 series was seen traded with only one unit on a day while on another day, there were 1,564 units transacted.

Investors who want to sell substantial units can stagger sales based on the bid and ask-spread.

Earlier, most series were available at lower prices — ₹200-300 lower (or 5-10 per cent discount) — to the prevailing spot price. But the discount has now come down to 1-2 per cent.

Also note that most brokers do not allow buying of these bonds in the secondary market as there is no inter-depository settlement mechanism. If both buyer and seller accounts are from the same depository (NSDL or CDSL), then there is no issue . The problem arises when their depository accounts are different.

Interestingly, selling SGB units is operationally easier than buying. While selling, the broker’s responsibility is over once the units of the seller are transferred to the pool account of the exchanges. However, brokers such as HDFC Securities and Zerodha allow both buying and selling in SGBs. Investors have to bear the brokerage cost while selling and buying SGBs from the secondary market that range from 10 to 50 paise for every ₹100.

RBI’s buyback window

Though SGBs are issued with an eight-year tenure, they are locked in for five years. The RBI provides a buyback facility at the end of the fifth, sixth and seventh years. It opens a window at least 30 days prior to the coupon payment date to accept buyback applications. The buyback price is the previous week’s simple average of closing price of gold of 999 purity published by the Indian Bullion and Jewellers Association (IBJA).

The first buyback date in most of earlier issued bonds is just seven months away from now. For instance, the first buyback date for the SGB Tranche 1 falls on November 20, 2020. Similarly, the first buyback dates of SGB Tranches which were issued in FY17 are 9-24 months from now.

So, investors holding SGBs launched in the initial periods can consider the RBI’s buyback window.

Taxation

Capital gains are tax-exempt if SGBs are held till maturity (eight years). If you sell them in the market or after the five-year lock-in, the gains you make are taxable as capital gains. These will be taxable at your slab rate if your holding period is less than 36 months and at 20 per cent with indexation benefits for holding longer than that.

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