In the recent past, gold has had an impressive run. It began with the trade war between the U.S. and China, buying by central banks, and the uncertainty the pandemic unleashed. Since then it has slipped. But don’t let recency bias come into play. Be very sure of why you want gold in your portfolio and the purpose it serves.
When you look at the allocation of gold in your portfolio, take into account Gold ETFs (exchange traded funds), gold funds and physical gold (bars and coins). I would have suggested jewellery too, but individuals do not view that as an investment. Jewellery has sentimental value and is considered for sale only in dire circumstances.
Registered Investment Adviser Dev Ashish looks at what the Sovereign Gold Bond, or SGB, offers.
Price
Rs 4,662 per gram. A discount of ₹50 per gram from the issue price is given to those who apply online and the payment is made through digital mode. For such investors the issue price of Gold Bond will be Rs 4,612 per gram of gold.
Liquidity
You need to have a long-term perspective. The tenure of the SGB is 8 years from the date of issue. Should you need the money, there is an option for early exit after a lock-in period of 5 years. No redemptions are allowed before completion of the fifth year. Please keep that in mind when you are investing.
What do you do if you need the money before that?
Within a fortnight of issuance, SGBs are tradeable on stock exchanges. So if you hold them in demat form, you do have the option of selling it in the secondary market. But there is a catch here. When you sell the listed bonds, the market price at which is traded may be lower (or higher) than the original price at which it was issued.
Return
Since a SGB tracks the price of gold, the returns will follow the price of gold.
The additional factor is the 2.5% p.a. interest that is paid semi-annually on the original investment value. Let’s say you bought a bond at the rate of Rs 4,400. Even if the price has risen to Rs 5,100, the interest is still paid on Rs 4,400. Alternatively, if the price decreased to Rs 4,000, you still get 2.5% of Rs 4,400. That does not change.
Safety
These come with sovereign backing and are issued by Reserve Bank of Indian (RBI) on behalf of the Indian government.
The only risk associated with it is the price of gold which may dip when the bond matures. Gold, having no intrinsic value or cash flows that help in normal valuations, are determined by demand and supply. Factors determining that are numerous – financial crisis, crisis like a pandemic, wars, central bank activity, stock market performance, yields, and geo-political issues. So there is no saying what the price of gold will be when the bond matures. When you sell the bond, the price may be much lower (or higher) than at the time of investment. Or, may be around the same level too. There’s no telling.
Taxation
Taxable as per the tax rate applicable for your income slabs. The interest income is added to your total income under the head of “Income from Other Sources” and taxed as per tax slab rate accordingly. For those the in 10%, 20%, and 30% tax brackets, the pre-tax 2.5% return will be converted into post-tax returns of 2.25%, 2% and 1.75%, respectively.
Whether you redeem at maturity or after completion of fifth year, the capital gain is exempted from tax.
- Sale in the secondary market
Since they are traded on the stock exchange, you can sell them anytime. Any gains or loss arising will be considered as a capital gain (or loss). If you sell within 3 years, short term capital gains (STCG) is applicable and taxed as per your income tax slab. If you sell after 3 years but before maturity, long term capital gains (LTCG) is levied - 20% with indexation.
Not applicable.
Not applicable.
Purchase
Investors can buy gold bonds from commercial banks, Stock Holding Corporation of India Limited (SHCIL), post offices designated by the RBI and recognised stock exchanges.
Limit
The bonds are issued in denominations of one gram of gold and in multiples thereof. The minimum investment in the gold bonds shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities. In case of joint holding, the limit applies to the first applicant.
Investment
These parameters should help you decide whether or not you should invest in SGBs.
- Long-term perspective
- Welcome regular interest payment
- Safety is a prime concern
- Looking at gold as a portfolio diversifier or hedge
- Allocation to gold does not exceed 15% of your overall portfolio
- Confident that the price of gold will show some appreciation over 8 years
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