The fourth tranche of the Sovereign Gold Bond Scheme opens on Monday amid the yellow metal going through a bull run that took it price to nearly three-year high. In the domestic market, gold prices closed at Rs 30,800 per 10 gram on Friday, giving a nearly 23 per cent return during the year, making it one of the best asset classes to invest in recent months.
Tracking the market price, the issue price of the Sovereign Gold Bond has been fixed at Rs 3,119 per gram. An individual investor can invest for a unit of one gram with a maximum of 500 grams. Besides carrying an annual interest rate of 2.75 per cent, the bonds will be redeemed at the prevalent market price of gold. The bonds, which will remain open from July 18-22, have tenure of 8 years, with exit option at the end of 5th, 6th and 7th years.
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So how good are these bonds? If you want to have gold holdings in your portfolio, should you opt for this route to park your money? Is this a good time to invest or are there risks involved?
Personal finance advisors and gold experts feel that the bonds could be good investments with the future of gold looking bright. However, they say one needs to take into consideration liquidity issues and other fixed-income investment options before deciding to go for the Gold Bonds.
Arvind A Rao, founder Arvind Rao and Associates, a financial planner, feels the bonds could be a good option for those who are looking to invest in the precious metal. “The bonds would be good for those who are looking to invest in gold. The yellow metal is a safe-haven investment and these bonds have the added element of government guarantee. It is for those who want complete safety,” Rao told FeMoney. However, he added, that aggregate gold holding in a portfolio, both physical and in other forms, should be in the range of 8-10 per cent.
Saurabh Gadgil, CMD, PNG Jewellers and Director, India Bullion and Jewellers Association, is also bullish on gold and feels the Gold Bonds would elicit good response. “With the global uncertainties including Brexit and the recent terror incidents, gold prices would move higher from here on. The bonds should get a good response,” he said.
However, Gadgil felt those who want liquidity should invest in physical gold instead of Gold Bonds. “It is easier to liquidate physical gold,” he said.
Ishu Datwani, founder, Anmol Jewellers, however, feels that investors might stay away due to liquidity concerns and low returns. He said there is also the risk of the market price of gold not going up much from the current level at the time of redemption some years later. “I don’t see a big response to the bonds. 2.75 per cent annual return is nothing. There are better investment options giving higher assured returns in the market. Moreover, though gold is bullish now, there is the risk of prices not appreciating much from the present levls when the bonds come up for redemption. Also the bonds are not liquid like physical gold,” Datwani said.
The government had raised Rs 1,322 crore from the earlier tranches of the Sovereign Gold Bonds, according to reports.
We take a look at the pros and cons of investing in Sovereign Gold Bond Scheme
- Gold prices on a bull run, could move higher on global uncertainties
- No handling risk as is there in buying physical gold, no storage risk
- Carries government guarantee
- Assured return of 2.75 per cent
- No capital gains tax, though interest component is taxable
- Can be used as collateral for loans
- Liquidity is a concern since exit option is available only after the 5th year
- There is market risk with the possibility of capital loss if gold prices fall during the holding period
- 2.75 per cent annual assured return is low compared to many fixed income instruments, including small savings, bonds and debentures