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BT Buzz: Sovereign gold bonds coincide with Akshaya Tritiya; should you buy?

The government, in consultation with the Reserve Bank of India, has launched the first among six tranches of sovereign scheduled for the financial year 2021

Aprajita Sharma April 20, 2020 | Updated 16:14 IST
BT Buzz: Sovereign gold bonds coincide with Akshaya Tritiya; should you buy?
While physical gold only offers you capital appreciation, SGBs will pay you an additional interest at the rate of 2.5 per cent per annum

Gold is one of the most preferred traditional investment options in India. Each year around Akshaya Tritiya, the demand for sparkles with most people willing to make some customary purchase. This year, with nationwide lockdown due to the spread of the coronavirus, things are different. Buying physical gold is challenging in current circumstances. However, your auspicious gold buying to celebrate Akshaya Tritiya on April 26 can still happen. All you have to do is turn to paper gold. One of the best options (Sovereign Gold Bond) to turn to paper gold opened for subscription today, coinciding with Akshaya Tritiya.

The government, in consultation with the Reserve Bank of India, has launched the first among six tranches of sovereign scheduled for the financial year 2021. The bond will close for subscription on April 24 and units will be issued on April 28. The issue price for the SGB has been fixed at Rs 4,639 for every gramme of gold. If you subscribe to it digitally, you will get additional Rs 50 discount per gramme on the issue price.

One is required to buy at least 1 unit (1 gm of gold) of the bond and not more than 4 kg of the gold in a financial year. You can log on to the RBI website or that of designated banks or post offices to download the application form. But, before you buy SGB, you must know its key features and benefits. We have a lowdown for you:

Earn regular interest: While physical gold only offers you capital appreciation, SGBs will pay you an additional interest at the rate of 2.5 per cent per annum. Interest is credited after every six months to your linked bank account. Your investment in gold grows with the gold prices and you receive your invested money back at prevailing prices at the time of maturity.

Know the tenor and premature withdrawal options: The tenor of the bond will be for a period of 8 years with exit option after the fifth year of the date of issue. You need to approach the concerned authority thirty days before the coupon payment date if you have to redeem your units prematurely. "Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date," explains Deepak Jasani- Head of Research, HDFC Securities.

Liquidity option through exchanges: These bonds are listed and traded on the BSE and NSE. So, technically, you can sell your units anytime if you hold it in your demat account. However, the demand for SGBs in the secondary market has not been impressive. You may not find any buyers or even if you do, you may have to sell it on discount. "Most of the past series of SGBs are trading at a discount to the gold prices due to lack of liquidity and depth in the market and uncertainty on final maturity value," says Jasani. Thus, consider SGBs only if you are sure you can stay invested at least for five years.

Loan against SGBs: SGBs can be used as collateral for loans at the time of financial need. "The Loan to Value ratio will be the same as applicable to ordinary gold loan prescribed by RBI from time to time. Granting loan against SGBs would be subject to decision of the bank/financing agency, and cannot be inferred as a matter of right," explains RBI.

These bonds are transferrable: You can transfer your bonds to another person as well by filling up Form 'F'. Whatever capital gains you make on transfer of the bond will be taxed at 20 per cent but with indexation benefits (if transferred after three years).

How it is taxed: Although the interest that you receive semi-annually is taxable (as per your slab rate), the capital gains arising on redemption have been exempted from income tax. The exemption is only if the bonds are held till maturity. If you redeem your units before maturity, it will attract 20 per cent tax after indexation benefit if held for three years.

Understand the risks: SGBs come with sovereign guarantee therefore risk of default is negligible. The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip. The only risk it involves is market driven gold prices. "There may be a risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold which he has paid for," explains the RBI. When compared to physical gold, which will have similar capital loss if prices fall, SGB scores better as you would still walk away with 2.5 per cent additional interest annually.

Should you invest

Gold has historically worked as an excellent hedge against inflation and currency risks over a long period. "Gold may not give you regular returns year after year but over 5-7 years the rupee denominated returns are decent," says Jasani. Since this bond comes with a tenure of 8 years which is on the longer side, therefore you should target this investment for your long terms goals.

Most experts suggest that your investment in the yellow metal should be around 10 per cent of your portfolio. Typically the value of the gold goes up when economic conditions are uncertain as has happened now amid coronavirus-induced slowdown. "The gold prices have run up significantly by around 40 per cent since Oct 2018 when the price was $1200 per ounce to the current price of $1680 per ounce as on April 18, 2020. Nevertheless, certain allocation to gold is definitely warranted and 5-15 per cent of allocation to the overall portfolio has historically led to better risk adjusted overall returns," says Vinit Pagaria, Head of Research & Analytics, StockEdge. Gold price has already registered a significant jump within last one year which is unlikely to be repeated in near future. It would make sense to go for this investment only to reach your portfolio allocation target or to meet the physical gold need for a life event like your child's marriage.

Since gold prices fluctuate on the basis of global macroeconomic factors and dollar-rupee exchange rates, you may consider investing in SGBs in a staggered manner, not lumpsum. "Doing an SIP in every tranche of gold can be considered by investors who are either underinvested in gold or have regular fresh monies for allocation among various asset classes or need to accumulate gold for wedding or other auspicious occasions," says Jasani.

Also read: Gold prices plunge on firm dollar, hopes of re-opening of US economy

Also read: 1,000 foreign firms mull production in India, 300 actively pursue plan as 'Exit China' mantra grows

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