Personal Finance

Should you invest in the latest Sovereign Gold Bond issue?

Maulik Madhu BL Research Bureau | Updated on August 11, 2021

Current issue priced lower than earlier tranches but gold prices may remain weak in the short term. Another tranche opens on August 30

The latest Sovereign Gold Bond Scheme 2021-22 - Series V is open for subscription until August 13, 2021. The issue price is ₹4,790 per bond (equivalent to one gram of gold). Those applying online and paying digitally get a discount of ₹50 on the issue price.

Why invest?

The 16 per cent fall in gold price in rupee terms since the August 2020 high provides a window of opportunity for investors. Those with a long-term investment horizon can consider buying SGBs in the ongoing issue to add to their long-term gold allocation.

The current SGB issue price of ₹4,790 is lower by ₹17 to ₹99 per bond than in the preceding three issues — one in July and two in May this year. The price is a simple average of the price of gold (999 purity) for the last three business days preceding the subscription period.

Sovereign Gold Bond shines this Akshaya Tritiya

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 returns 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 only 1 per cent possibility of negative returns.

Keep powder dry

However, investors are advised to keep some powder dry for future tranches, which may come at lower prices. The near-term outlook for gold appears weak. The stronger-than-expected US jobs data has fuelled fears of the US Fed unwinding its ultra-loose monetary policy to rein in inflation. A stronger US dollar and rising bond yields are expected to keep gold prices under pressure. As of now, there is another SGB issue opening on August 30.

The brass tacks

SGBs are issued in denominations of one gram of gold and in multiples thereof. 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. SGBs can be bought from banks, designated post offices, stockbrokers and the NSE and the BSE.

First tranche of 2015 Sovereign Gold Bonds to be redeemed at ₹4,837 per unit against ₹2,684 issue price

The investment tenure of these bonds is eight years. However, early redemption with the RBI is allowed from the fifth year. For this, you must approach the concerned bank or whoever you bought them from, 30 days before the coupon payment date (half-yearly). 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.

Those interested in better liquidity must instead consider gold ETFs that can be bought and sold anytime. However, gold ETFs involve an expense ratio while there is no purchase cost for SGBs. Also, the capital gain on SGBs is 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 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.

Published on August 11, 2021

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