Gold investors in India seem to have come of age as they are showing increasing interest in paper gold, especially in sovereign gold bonds (SGBs). Series I of SGBs, whose subscription ended on May 21, received the second highest subscription by value and volume since SGBs were launched in 2015. The subscription came in at Rs 2,541 crore by value, while in quantity terms, the units subscribed equalled 5.32 tonnes.
To put it in perspective, the subscription value in Series I alone is higher than Rs 2,316.37 crore subscribed in SGBs in entire FY20. In FY21, however, the subscription stood at a whopping Rs 16,048.74 crore in value.
SGBs had received record subscription of Rs 3,387 crore in Series V in FY21 in terms of value and 6.35 tonnes in terms of quantity. SGBs were launched with an intent to cut imports of the yellow metal.
Broking firms such as Zerodha and HDFC Securities recorded robust growth in SGBs on their platforms. Launched in November 2016 on Zerodha's platform, SGBs hardly witnessed any activity in the first few issues, but volumes increased April 2020 onwards, rising from around 10 kilograms earlier to 100-200 kilograms over the last few issues. Zerodha CEO and founder Nithin Kamath says SGB Series I issue was its highest ever at 250 kgs.
HDFC Securities had launched SGBs in July 2016. "We launched it the same day when it was made available on the exchange platform. We have seen 8-9 times growth between 2016-2017 and 2020-2021 in terms of value and 5 times in terms of quantity," says Ashish Rathi- Whole Time Director, HDFC Securities.
"The pandemic uncertainties have led retail investors to safe haven asset like gold. Many retail investors have opted for paper form of investment due to lockdown restrictions and storage risk," he adds.
Three series in close succession
The government typically comes out with 10-12 series of SGBs in a financial year. Subscription for two series for FY22 has concluded, while the third one will conclude on June 4. Series IV will be launched on July 12. Subscription data for series II hasn't been published yet.
Get paid for ownership
There are two major reasons why investors prefer SGBs over any other paper form of the gold -- 2.5 per cent per annum interest paid semi-annually on investment amount, and tax-free maturity amount after 8 years.
Explaining the difference between SGBs and digital gold, Kamath says, "SGBs are a far superior way of investing in gold compared to digital gold. In digital gold, you pay 3 per cent GST and 3-4 per cent in spreads and commissions. Compare that to SGBs, you get paid to own them given that you get an interest of 2.5 per cent. For example, in Series I in FY22, investors saved over Rs 6 crore in GST and commissions compared to digital gold," says Kamath.
Besides, if you subscribe to SGBs online, you get Rs 50 discount on the issue price. For example, the issue price for the ongoing Series (Series III) has been fixed at Rs 4,889 per unit. If you apply for it online and make payment in digital mode, the issue price will come down to Rs 4,839 per unit. One unit comprises 1 gram of gold.
Lumpsum versus staggered investment
As it is hard to predict price trajectory, lumpsum investment is advisable only when gold prices are trading much below the all-time high levels. Investing some amount in each tranche provides the opportunity to control time risk. "The tranche gives the opportunity to capture the price differences and a window to add more funds to the SGBs, periodically. One-time investors can go for lumpsum investment in any of the series," says Rathi of HDFC Securities. Gold prices had hit all-time high of Rs 56,191 in August 2020.
Gold gives you a hedge against inflation. Experts advise keeping at least 5-10 per cent of your portfolio in gold.
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