Home > Money > Q&A > How can sovereign gold bonds be made more investor friendly?

The affinity of Indians towards gold is well known. In order to cater to this demand, the government launched the Sovereign Gold Bond Scheme (SGBs) in 2015. SGBs not only allow investors to benefit from the capital appreciation but also pay a fixed interest on the holding. They are also tax-efficient as capital gains are tax-exempt if they are held till maturity (eight years). However, investors face liquidity issues as SGBs can’t be redeemed before five years and the secondary market, where they are listed, is not liquid enough. Also, availability can be a problem. Renu Yadav asked experts what can be done to improve SGBs.

Chintan Kotak Director, IIFL Securities Ltd
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Chintan Kotak Director, IIFL Securities Ltd

The option to convert into physical gold might help

SGB scheme is a very good product for investors interested in building an ideal asset allocation. Also, gold has a higher chance of capital appreciation, with volatility lower than equity. The standard deviation of eight-year rolling returns of gold is 7%, which can give reasonable stability to your portfolio.

It gives the benefit of capital appreciation in gold prices with the receipt on redemption being exempt from capital gains tax. It gives an additional benefit of interest payout of 2.5% per annum on the issue price, which is an enhancement over gold returns. In the secondary market, a person can buy the bonds prior to the record date and becomes the new holder of the bond and receives the interest on the bond. However, in the secondary market, it remains illiquid.

If the government provides a frequent buyback window after one year (like it provides a window after the fifth year to redeem the investment at the prevailing market price) with tax benefits, liquidity may improve. Also, if there could be an option to convert gold bonds into physical gold at certain designated centres without any significant charges, it may help.

Chirag Mehta Senior fund manager, alternative investments, Quantum AMC
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Chirag Mehta Senior fund manager, alternative investments, Quantum AMC

Illiquidity along with lack of availability works against it

Secondary market illiquidity is one of the biggest drawbacks of SGBs issued by the Reserve Bank of India (RBI). Although one can exit from SGBs in the secondary market any time, the low levels of liquidity result in price risks. In fact, most of the 37 issues of SGBs which are trading on the exchange currently are at a discount to the current price of the gold and at times have traded at significantly steep discounts. Such steep discounts could potentially dwarf the 2.5% annual interest offered by the bonds.

Unlike gold exchange-trade funds (ETFs), the lock-in period of SGBs leads to non-fungibility of the underlying asset. Also, considering the illiquidity, there is a high probability that gold bonds, on account of their structure, may trade at a substantial discount in the absence of natural buyers.

In addition, availability is an issue. SGBs are not available on-tap all year round. Instead, the government opens a one-week window for the fresh sale of SGBs every two or three months. This could result in investors not being able to allocate to the yellow metal in a systematic way or whenever they wantS

Santosh Joseph Founder and managing partner, Germinate Wealth Solutions
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Santosh Joseph Founder and managing partner, Germinate Wealth Solutions

Need to work on distribution, awareness about SGBs

old bonds clearly have an edge over physical gold for investors looking at the asset for long-term savings, wealth creation or other specific needs. However, there are certain measures that can be taken to make them more investor-friendly and to make people aware of the benefits of these bonds.

First, there needs to be better awareness and marketing of the features and benefits of SGBs over physical gold. Most people are still not very sure about how gold bonds work compared to physical gold. Also, they are not aware about the fact that, unlike physical gold, SGBs are not very liquid in nature.

There is also a need to increase the intermediation and distribution of SGBs to have more agents, advisers, points of sales, specific touch points (offices) for this product. There is a need to increase online access. Mobile apps, specific online websites, even tele-buying with vernacular interface should be introduced to make SGBs available to the masses.

I believe SGBs have a huge scope to grow. The recent upward movement in gold prices has made people attracted to the asset, especially given the crisis.

Suresh Sadagopan Founder, Ladder7 Financial Advisories
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Suresh Sadagopan Founder, Ladder7 Financial Advisories

SGBs are good schemes and need no tinkering

SGBs are a very good investment option for those who are looking to invest in gold as an asset. It offers tax-free returns equivalent to the gold returns in eight years (the product tenure) and the government of India also offers returns of 2.5% every year, over and above that. Since it is bought in paper form, one need not be concerned about purity, safe keeping and insurance, among other factors. SGBs can also be used as a collateral.

While there is so much going for it, this product is probably still not too popular, may be due to lack of awareness, an investment period of eight years and due to the penchant of investors to go for a product only when an asset class is doing well. Gold is a strategic investment in one’s portfolio. Studies have shown that gold reduces the risk in the portfolio. So investors shouldn’t only invest when gold is doing well but should be ready to keep it for the long term, the way they hold real estate for decades.

SGBs are excellent products and no changes are required in them. It is only lack of awareness that keeps people away from investing in them.

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