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Is this a good time to invest in gold bonds?

By Bindisha Sarang
May 02, 2020 09:42 IST
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You also avoid capital gains tax during redemption in case the gold price is higher, making them tax efficient.

With the Reserve Bank of India announcing Series-I of the sovereign gold bond (SGB) scheme for 2020-21, investors are wondering if this is a good time to invest in the yellow metal.

After all, it has run up nearly 100 per cent in the past one year.


Under the scheme, you can buy a minimum of 1 gm of gold at Rs 4,639 per gm, with Rs 50-discount on a purchase made online.

The upper limit for investing via SGBs is 4 kilos of gold.

You also get 2.5 per cent interest on the initial investment, payable every six months.

The advantages are plenty.

There are no hassles such as purity checks, making charges, and locker charges.

You also avoid capital gains tax during redemption in case the gold price is higher, making them tax efficient.

Nitin Rao, chief executive officer (CEO), InCred Wealth Management, says, “In the long term, gold has given around 7 per cent returns annually.

"Add to that 2.5 per cent returns on the initial investment on SGBs, and returns look quite attractive at 9.5 per cent.

"Between 2008 and 2011, gold gave an internal rate of return of 26 per cent.

"If you look at the dollar per ounce, the price of $1,920 was the highest in September 2011. Today, it is $1,680 per ounce.”

Given these numbers, experts believe the current volatility is likely to push the prices beyond their highest peak.

Says Roopali Prabhu, head-investment products, Sanctum Wealth Management: “An infusion of liquidity as a policy action by the Federal Reserve and European Central Bank, and the potential ignition of the trade war may lead to all-time highs for gold.”

There are not too many negatives to this instrument. While liquidity can be an issue with an eight-year maturity, it can be sold to a bank after five years.

Sales on stock exchanges can happen any time.

However, you need substantial quantities to be able to buy or sell.

Without a doubt, this remains the most preferred way to invest in India.

While there are many advantages, the lack of a well-established robust secondary market for trading becomes a minor constraint.

Prabhu says, “Many millennials and their next-generation tend to be underinvested in gold. They should go ahead and buy.”

All experts suggest laddering is a good idea.

Instead of buying gold worth Rs 1 lakh in one series, it’s better to buy a smaller amount in three-four series.

You will automatically end up laddering. Even after the bond matures, you can reinvest the money in SGBs to maintain asset allocation (unless you need to rebalance).

But not everyone prefers gold as an instrument of investment.

Sriram Iyer, CEO-digital wealth, Anand Rathi Wealth Management, says, “If I take into account the last 20-25 years, the risk-to-reward payoff, when it comes to investing in gold, is inferior.

"Why would I want to take close to equity-type risk for a return which is very close to fixed income for investors?

"You should look at the wealth creation journey over a 10-year horizon.”

Image used for representation purpose only

Photograph: Jo Yong-Hak/Reuters

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Bindisha Sarang in Mumbai
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