Gold bonds rise and shine
Sovereign Gold Bonds are attracting wide range of investors and acceptance across spectrum, be it retail, HNIs or ultra HNIs:
Santosh Shetti, Product Head, Investment, Insurance & Research at Motilal Oswal Financial Services and Anil Gupta, Vice President, Financial Sector Ratings at ICRA, analyzes the progress of Sovereign Gold Bonds scheme since 2015.
Mehul Dani: What is the total volume and value of investments in gold bonds through banks, brokerage houses and wealth management companies in all the earlier Series since inception in November 2015?
Santosh Shetti: Since the launch of the first Sovereign Gold Bond Scheme by RBI, there have been 50 issues till May 2021. Over the years, the scheme has started attracting wide range of investors and acceptance across spectrum, be it retail, HNI or ultra HNI. Last financial year was a historic year for SGB, as investments were higher every month and the year. In August 2020, Series V mobilized over `33 billion and in FY21, overall mobilization was `160 billion. This was higher than all previous years’ combined mobilization of `96 billion.
The current FY has started on a great note. In May 2021 Series-1 has mobilized `25 billion, which is the 2nd highest monthly mobilization ever in the history of SGB Series since launch.
Anil Gupta: As much as 68.6 tons of gold or units of gold bonds have been issued since November 2015. The total value at issuance cost comes to `282.36 billion.
Do you think the authorities have been successful in attracting customers to invest in gold SGB?
Santosh Shetti: Yes, last year was a defining year for SGB. There are customers, who have bought it as an alternative to physical gold or just as a pure investment to be held till maturity. There are some, who have bought them from a hedging perspective during the pandemic times to take benefit of gold prices rising in uncertain times. SGB has helped the government in its objective of financialization of savings from physical assets to financial assets. Online buying, available with `50 per gram discount, has resulted in maximum buying.
Anil Gupta: Given annual imports of almost 700 tons, the issuance of 68 tons since inception is not very significant, but still a good amount. Also, in relation to the overall debt of the Government of India at `109 trillion, the amount of borrowings through gold bonds is less than 0.5% of total debt.
How has gold as an asset class performed over the years, say in the last 3 or 5 years, compared with other asset classes and investment options?
Santosh Shetti: Gold has performed very well in the last 3-5 year perspective, in view of regular market uncertainties over these periods. In the calendar year 2018, 2019 and 2020, gold had generated highest return compared to other asset classes.
However, one should not invest in SGB or gold purely based on past years’ returns. It has to be more from the perspective of asset allocation. It would be prudent to ensure the allocation to gold (preferably through SGB, etc) should not be more than 5-10% of the total asset allocation (ie equity, debt, cash, gold).
Anil Gupta: Recently, RBI has announced a buyback price of 4837 per gram for the first tranche of gold bond issued in November 2015 at `2864 per gram. This along with 2.75% interest on these bonds works out to be a 5.5-year CAGR of 14%. Nifty was 7900 in November 2015 and has given returns at CAGR of 13% apart from dividend yield of 1-2%. 1-year bank deposit rates during this period ranged between 7.5-8.0% at beginning of 2016 to 5.0-5.5% now.
Hence, if we compare with fixed deposits, gold bonds have given better returns. Moreover, the gain on gold bonds also attracts lower tax than fixed deposits @ 20% with indexation, as compared to a fixed deposit, which is at marginal tax rate.
Tax adjusted returns for Nifty will be better than gold bonds, as long-term capital gain on equity is lower at 10%. However, equity investments do come with higher risks also.
Although, the performance of one of the series of gold bond may not be a reflection of future returns, as the domestic gold bond prices typically outperform during periods of depreciating Indian rupee apart from international gold prices.
Recent gold bond issuances have also been at lower rates than in the past because of decline in domestic gold prices.