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Photo: iStock
Photo: iStock

Sovereign gold bonds catch investors’ fancy. Should you consider investing in them too?

Gold bonds suit those with a longer time horizon, as they come with a long maturity of eight years

The first tranche of sovereign gold bonds (SGB) for financial year (FY) 2021 saw subscription of 17.73 lakh units worth 822 crore—which is highest since the October 2016 issue—as per data provided by the Reserve Bank of India (RBI). One unit of SGB is equal to one gram of gold and was priced at 4,639 per unit for the first tranche of FY21.

The first SGB issue came in October 2015, and investors bought 9.14 lakh units worth 245 crore. The popularity of the scheme surged, as it is the only gold investment option to pay guaranteed interest. The October 2016 issue saw the highest-ever subscription, as people bought 35.98 lakh units worth 1,081 crore. The issue was priced at 3,007.

However, interest in SGBs has been declining. “You have to see the response in line with performance of other asset classes, including equities, which did better in 2017 compared with gold. People also realized that the liquidity is not very good in the secondary market for gold bonds, which makes exiting them before the maturity a little difficult," said Chirag Mehta, senior fund manager, alternative investments, Quantum Mutual Fund.

The April issue opened on 20 April and closed on 24 April, a couple of days before Akshaya Tritiya, an occasion considered auspicious to buy gold. “Around 5-10% subscription could be attributed to the lockdown, as people couldn’t purchase physical gold," said Chintan Kotak, director, IIFL Securities Ltd.

Apart from this, gold is also seen as a safe haven asset. “In times of uncertainty, gold has always been a go-to asset," said Saurabh Bansal, founder of finatwork wealth services. As we are fighting the covid-19 pandemic, other asset classes, including equities, have been thrashed badly, and investors are flocking to safer assets. In the past one year, gold has delivered around 45% return.

“People are understanding the importance of asset allocation and are shifting a portion of their money from other asset classes to gold," said Kotak.

SGBs are considered one of the best alternatives to gold investment. “We have seen significant response to SGBs in recent times, as investors get interest in addition to any favorable movement in gold prices," said Bansal.

Meanwhile, RBI has announced the dates of the upcoming issues of SGBs till September. The next issue will open on 11 May. “It is likely to see good or even better subscription, as we have already started receiving queries from our clients," said Kotak.

Investors should have gold in their portfolio, as it provides diversification, however, they should not allocate more than 10% of their assets in gold. While investing in gold bonds you should also keep the lock-in period in mind.

“Gold bonds suit those with a longer time horizon, as these bonds come with a long maturity (eight years) and limited liquidity in the secondary market. Those who wish to take positions for a shorter period, gold ETFs and gold savings mutual funds would suit them better," said Bansal.

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