BETTER THAN GOLD
For ‘investors’, sovereign gold bonds are easily the better option
Are you the kind who likes gifting gold during festivals and weddings or regardless of occasion? Or someone who likes to buy gold bars and coins as an investment? If that’s the case, then consider a smarter alternative. Starting 2015, the government began offering Sovereign Gold Bonds, or SGBs, that not only match physical gold in value terms, but also provide a fixed interest rate like any other fixed income bond.
“Buying Sovereign Gold Bonds is better than buying physical gold now,” says Brijesh Parnami, executive director and chief executive officer at Essel Wealth Services. “SGBs pay you an assured interest of 2.5 per cent over and above the price returns on gold.”
Handling physical gold, whether jewellery or bars and coins, is fraught with risk. “With SGBs, there is no problem of storage, no making or breaking charges, no need for any purity certificate,” adds Parnami. “Physical gold is highly susceptible to theft and burglary. With SGBs, your investment remains safe.”
THE FINER DETAIL Parnami is referring to the dematerialised or demat form you can hold SGBs in, like shares you keep in a demat account.
Unlike lockers, where banks charge a fixed amount for storing physical gold, SGBs can be stored anywhere. The gold bonds also carry a sovereign guarantee, which means there is no risk of default on payment.
The SGB scheme allows one to purchase a minimum of one gram and multiples thereof, and a maximum of four kilograms of gold. SGBs can be purchased directly from banks, des ignated post offices and recognised stock exchanges or indirectly through agents. Currently, the government is offering a discount of Rs 50 per gram to online subscribers.
“The government is giving you an annual interest rate of 2.5 per cent; otherwise you get nothing from gold,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories. The interest is credited halfyearly to one’s bank account.
CAN ONE EXIT AN SGB? While the interest rate SGBs offer make them an attractive option, can one redeem them in case of an emergency? While SGBs have a tenure of eight years, one can sell them like shares or bonds. SGBs are listed on India’s premier stock exchanges, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), and you can buy or sell through them.
Additionally, the government offers an exit window. One can return the bond to the government on finishing the fifth, sixth or seventh year. On completing the eighth year, the bond can be redeemed, with the investor getting the prevailing price of gold in the market. One can also pledge SGBs for a quick loan in case of a contingency. “Loan against gold is a very popular product. Banks extend loans against physical gold investments anyway. Such loan facility is
If held till maturity, SGBs are tax-free. The gold in this form also earns interest and carries a sovereign guarantee
allowed against SGBs too,” says Parnami.
GOLD RUSH
Typically, people buy gold either to make jewellery or as investment. Physical gold makes sense if the need is immediate. But should the purpose be investment for the future, such as for the marriage of one’s children a few years down the line, gold financial products such as SGBs make more sense.
“Some people are sure about investing in gold for their actual goals like a son’s or daughter’s wedding or for gifting. For such investors, SGBs are a better idea,” says Sadagopan. Adds Parnami, “SGBs suit those who are dedicated buyers of physical gold and keep accumulating it through their savings.”
With gold jewellery constituting a big expense in weddings, buying SGBs in tranches over the years can help meet requirements. This helps average out the price of gold over the years. It also ensures a fixed quantity of gold at the end of eight years, earning interest simultaneously. “One may keep investing in various tranches of SGBs as and when the government issues them,” says Parnami.
GOLD AS INVESTMENT Should one then break one’s fixed deposits, sell their shares and exit their bonds to invest in SGBs? Experts warn against doing that. “The problem with advising (any) financial product around gold is that people buy more gold and end up having higher exposure to the metal than needed,” says Vijai Mantri, co-promoter and chief mentor at Buckfast Financial Advisory Services.
Experts recommend anywhere between five and 15 per cent exposure to gold in one’s portfolio. This can include bars, coins, gold mutual funds and SGBs. “Since gold has a low to negative correlation with other financial assets, the right level of gold in a portfolio can absorb the shocks of volatility in other asset classes such as equities and bonds. There is nothing wrong with a 5-10 per cent allocation to gold,” says Sadagopan.
TAX IMPLICATIONS Apart from regular interest income from SGBs, the government also offers tax benefits if the bonds are held until redemption. Says Parnami, “If you hold physical gold or SGBs for more than three years, it is considered a long-term holding and becomes eligible for a 20 per cent long term capital gain (LTCG) tax with indexation. Selling before three years is considered short-term capital gain (STCG) and taxed as per the slab rate applicable to the individual. However, if you hold SGBs till maturity, the complete gain is tax exempt on redemption. Interest earned on SGBs, though, is eligible for taxation.
It does make complete sense therefore to look at STGs rather than physical gold. “The facility of buying small quantities can help multiply investment benefit as one can gradually accumulate gold in one’s account and acquire a big portfolio while getting the advantages of rupee cost averaging,” says Parnami. “If investing for a very long period, then the 2.5 per cent per annum interest can make a big difference to the overall return.”
Buying SGBs incrementally can help one accumulate gold in a large quantity with the benefit of rupee cost averaging