The seventh tranche of Sovereign Gold Bonds (SGBs) have been issued by the government at the price of Rs 2893. It is the fourth series in the current financial year and is open for subscription from February 27 2016 till March 3, 2017.
Before discussing the features of seventh tranche, it is interesting to see how previous tranches of SGBs have performed. Data shows that of the previous tranches that have already been listed on the exchange, tranche I and II have yielded return close to 2 and 8 per cent. That's not all. After including the fixed return of 2.75 per cent the return for the first two tranches have gone upto 4.75 and 10.75 percent. At the time when fixed deposit are offering you just 6 per cent and endowment policies not offering more than anything between 4-6 per cent, investing in sovereign gold bonds does not look a bad proposition.
The current tranche of SGBs offer fixed return of 2.5 per cent. However, the first five tranches offered 2.75 per cent but when gold prices started moving up, increasing the interest outgo of the government, rates were cut to 2.5 per cent. The fixed rate of return is paid on the initial amount of investment. To compensate for the reduction in interest rate the government reduced the issue price of the gold bond by Rs 50 per gram than the nominal value.
The picture, however, is not so rosy when we look at the return of last five tranches. The loss from these tranches range from 1 to 8 per cent (See table). But again the fall in return got cushioned to an extent by fixed return given with these bonds, which is otherwise not offered with exchanged traded funds and physical gold.
So don't overlook the benefits of gold bonds if you want to invest in gold. Any given day it is better than physical gold as well as ETFs because you don't need to pay any additional expenses. But the tenor of gold bonds is for a period of 8 years with exit option from 5th year to be exercised on the interest payment dates.
Don't put all your eggs in one basket. It is always good to diversify your portfolio with around 10-15 per cent invested in gold. Smart Investing is about growth through diversification and informed decision-making - when one asset class loses its steam, you need to be reap the benefits of another asset doing relatively better.
Not only for your portfolio, buying gold bonds is also good for the country as it will help in controlling the fiscal deficit of the country. Currently, around 20,000 tonnes of gold is imported every year resulting in huge outflow of dollars. Buying paper gold will help the government in controlling gold import. But when it comes to SGBs it seems just a beginning has been made. To give you an idea, only 3060 kg of gold have been collected so far from five tranches amounting to Rs 10,154 gold.
Spot gold has given 14 per cent return since September 2015. It is currently trading at the price of Rs 29,300. On the other hand, price of SGBs are fixed on the basis of simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Limited for the week (Monday to Friday) preceding the subscription period. Moreover, the bonds are sold through banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices and recognised stock exchanges.
Investors get return that are linked to gold on maturity. But market prices on the stock exchanges are not purely gold driven as they follow the concept of bond trading too. Though listing on the stock markets give liquidity but, currently, daily volumes are on lower side. For example, average daily volume for tranche 1 and 6 is between 150 and 200 units averaging daily turnover of just Rs 3 lakh to Rs 5 lakh.
So, if you want to diversify your portfolio consider investing in SGB to earn two streams of income. One from the movement of gold prices and another from fixed interest rate. Another piece of advice is not to buy jewellery from investment point of view as it just add to the cost in the form of locker and making charges. The new ways of investing in gold are way cost efficient. Most importantly, buy them in demat form as it also gives you an option to trade on stock exchanges.
PERFORMANCE OF SOVEREIGN GOLD BONDS