The last tranche (Series IV) of sovereign gold bonds (SGBs) for 2019-20 is open for subscription between 9 September and 13 September. The yellow metal has been in news for reaching all-time highs recently. Domestic price of gold touched a record high of ₹39,885 per 10 grams in the first week of September 2019.
With no end in sight to the flow of bad news on the domestic economy and global disputes, a prolonged period of uncertainty and tension seems to be on the cards. Along with the easy money policies being adopted by most central banks, including the Reserve Bank of India (RBI), it is in situations such as these that gold as an investment comes to its own. As an asset class, the biggest advantage that gold brings to the portfolio is the low correlation of its returns with traditional asset classes such as equity and debt and, therefore, it acts as a hedge against a strong fall in returns from other asset classes, which we are witnessing in the current market situation.
Among the various options available to invest in gold, SGBs issued by RBI on behalf of the government has emerged as a strong investor favourite. The latest tranche is the last in the series of four issuances planned for financial year 2019-20. The bonds will be sold through scheduled commercial banks, Stock Holding Corp. of India, the National Stock Exchange of India Ltd and BSE Ltd. The bonds are available for investment by resident individuals, Hindu Undivided Families (HUFs), trusts and charitable institutions.
Features of the bond
The bonds will be denominated in multiples of one gram. The price of the bond will be a simple average of the closing price of gold of 999 purity on the last three working days of the week preceding the subscription period. For subscribers who buy online and pay through the digital mode, the issues price will be ₹50 less.
The bond will pay an interest of 2.5% per annum on its nominal value. The interest will be paid semi-annually.
The tenor is eight years but investors will have the option to exit after the fifth year on the interest payment dates. The redemption price will be the simple average of the closing price of gold for the previous three days. However, the bonds are listed on NSE and BSE and investors can sell on the secondary markets.
If the bonds are held for the tenor of eight years, the capital gains will be exempt from tax but if they are sold or redeemed before eight years, the gains will be taxed after allowing for indexation benefits.
The bonds can also be used as collateral for loan. The holders can nominate up to two persons as nominees. The nomination can be changed at any time.
For individual investors, the minimum investment is one gram of gold and the maximum 4 kg. This limit is applicable for the financial year—April to March—and across the four tranches of the bond issues as well as any bonds bought from the secondary markets. Investors need to provide a self-declaration about the extent of their holdings in the application form at the time of subscribing to the issue.
The bonds may be held in physical or dematerialized form. The payment for the bonds can be made through cash up to a maximum of ₹20,000 or demand draft, cheque or electronic payment modes.
The permanent account number (PAN) of the first holder has to be provided at the time of making the application. The investor will also need to provide know your customer (KYC) documents to establish the identity and address such as the voter’s ID, Aadhaar and passport, apart from bank account details to facilitate payment of periodic interest and the redemption value on maturity of the bonds.
Should you invest?
SGBs are the best option to take exposure to gold given the interest payment, tax advantage and cost benefits since there is no storage or purchase costs associated with it.
“Sovereign gold bonds are the only way I recommend to invest in gold and hold it for the tenor of eight years," said Naveen Julian Rego, a registered investment advisor and certified financial planner. “And it is never more than 15% of the portfolio. Typically, it is for investors who may need to buy gold in the future for the wedding of their children," he added.
Investors can buy the bonds in the secondary markets too without affecting the exemption from long-term capital gains tax available on maturity of the bonds. Rego also pointed out to the possibility of investors with trading and demat accounts being able to buy the bonds at a discount to market prices in the secondary markets.
Your allocation to gold should not be more than 5-15% of your portfolio. Renu Maheshwari, chief executive officer and principal advisor at Finzscholarz Wealth Managers LLP, recommended a 5% allocation to gold and all of it through SGBs. “A client’s portfolio that has 55% in equity still managed a 10% return this year because of the allocation to gold," she said. “It renews our faith in portfolio construction principles like asset allocation and diversification," Maheshwari added.
Also, your gold allocation should not be a short-term holding given the volatility in prices. Invest in it for its diversification benefits and the stability it can bring to your portfolio returns.