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Why it makes sense to invest in gold bond schemes

September 09, 2016 12:57 IST

It’s good for diversifying portfolio and saving for long-term goals

With gold prices touching Rs 3,134 per gramme, investors who had put money in the first tranche of the sovereign gold bond (SGB) issue have gained 18 per cent in 10 months. If you add the 2.75 per cent interest that the government pays on the initial amount, the first year’s returns are around 21 per cent.

With every tranche, the investment mobilised has been increasing. The fourth series saw the highest investment of Rs 919 crore, despite it also being the priciest. Each bond, equivalent to one gramme of gold, was worth Rs 3,119. The government has now come up with the fifth tranche of SGB priced at Rs 3,150 per gramme.

“The response to this tranche, too, has been very encouraging,” says Vishal Gulechha, executive vice-president and head - equity product group, ICICI Securities. “These are essentially buyers who are moving away from physical gold and embracing the electronic format,” he adds.

But, does it make sense to invest in these bonds at the current price or are investors better off waiting for the next round? Since the beginning of the year, gold has seen a rally in both Indian and international markets. Domestic prices have risen 25.46 per cent since January and internationally prices rose 27 per cent. In the past three months, the return on gold is around eight per cent in both markets. “The rally was because of the weakening of the dollar after US non-farm payroll data didn’t meet street expectations,” says Gnanasekar Thiagarajan, director at Commtrendz.

Chirag Mehta, senior fund manager - alternative investments, Quantum Asset Management, says he is positive on gold because he sees scope for further rise. “The metal peaked at Rs 34,000 levels in India. We are around 9-10 per cent from there. Internationally, prices had gone past $1,900 per ounce during the bull run. Currently, it’s around $1,350 per ounce,” he points out.

While the investment makes sense from a returns perspective, experts say those looking to invest in SGB should not consider price as the only deciding factor as this is a long-term investment - the bond tenure is  eight years. In an environment where global uncertainties are affecting the Indian equity market, an investor should keep 10-15 per cent of the portfolio in gold, as it will help in hedging.

Gulechha says the yellow metal has other uses as well. If an individual wants to accumulate gold for goals such children’s wedding, then they must buy small quantities in every tranche. This will help to average the price of gold over time, like it happens with systematic investment plans.

The SGB fares better than buying physical gold. It gives investors an annual return of 2.75 per cent on the initial investment, paid every six months. There’s also exemption from capital gains tax on redemption, the individual doesn’t need to spend on storage and one can even take a loan against the bonds. These are also listed on stock exchanges. At present, the quoted prices of the previous four trances are close to physical gold prices in India.

Photograph: PTI Photo

Tinesh Bhasin in Mumbai