Buy gold bonds from secondary market

With five of the seven tranches trading at a discount, there is good opportunity for investors, provided they hold these bonds till maturity

Retail investors, betting on the yellow metal, have a good option now — the Sovereign Gold Bond (SGB). And the deal has got sweeter for those who want to buy these bonds in the secondary market on the platforms of the BSE or the National Stock Exchange.

Currently, five of the seven tranches are trading at a discount, making them a lucrative option for investors. For example, SGB tranche number five or the one which will mature in September 2024 is trading at ~2,828.6 (for one gram) — a discount of 10.2 per cent. Only the first two tranches — maturing in November 2023 and February 2024 — are trading at a profit of 3.8 per cent and 6.4 per cent respectively (see table).

But as Chirag Mehta, senior fund manager-alternative investments, Quantum Asset Management Company, points out, you should buy these bonds in the secondary market only if you are willing to hold them till maturity. “If you want to trade these bonds in the future, one does not know if there will be enough liquidity,” he says.

Most industry players believe the SGB secondary market is quite nascent and the dice might be loaded heavily in favour of those who do big deals through wholesale brokers. However, it is comparatively simple for even retail investors to buy these bonds in the secondary market. One has to simply log in through the brokerage account and put in a trade.

For the uninitiated, the first tranche of SGB was launched in November 2015. Till now, eight tranches have been launched. Of these, seven tranches have been listed. The eighth is expected to be listed soon. These bonds have a holding period of eight years. The government pays an interest of 2.5 per cent on these bonds on the initial investment. This means that for secondary market buyers, if the price of the bond goes up in the coming years, the yield will go down; but, vice versa will also holds true.

As far as taxation goes, the interest income on these bonds will be taxed according to your income tax bracket. The capital gains tax arising on redemption of SGB at maturity has been exempted. Indexation benefits will be provided on long-term capital gains accruing to any person on transfer of bond.

The good news is that more and more wealth managers and financial planners are beginning to advise SGBs as an alternative to physical gold. Says Kartik Jhaveri, director, Transcend India: “Though the product is in its initial stages, I am recommending it to clients and even advising them to buy it in the secondary market.”

He believes that the bonds could be trading at a discount currently because many feel that going forward, the rupee will strengthen further against the dollar, thereby reducing the gains for gold prices. Typically, returns from gold have been aided by the consistent decline in the value of the rupee against the dollar. This inflates the returns from gold for the Indian investor.

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