Planning to invest in Sovereign Gold Bond this Dhanteras, here are a few tips

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New Delhi | Updated: Oct 27, 2016 9:55 AM

Prime Minister Narendra Modi on Thursday unveiled the much awaited set of gold schemes each serving a unique purpose; primarily aimed at bringing out the gold holdings held by households and institutions and using it productively at the same time trying to discourage further physical buying of gold in order to reduce the pressure on India’s current account.

gold rateThe interest on the bond will be paid on investment value. Even, if the gold prices move up, the yield will be calculated on investment value and not on the mark to market value. (Reuters)

Prime Minister Narendra Modi on Thursday unveiled the much awaited set of gold schemes each serving a unique purpose; primarily aimed at bringing out the gold holdings held by households and institutions and using it productively at the same time trying to discourage further physical buying of gold in order to reduce the pressure on India’s current account.

One of the schemes launched by PM is Sovereign Gold Bond. Sovereign gold bond is a paper alternative to address investment demand for gold in India and thereby reduce physical demand for gold and in turn reduce gold imports.

Unlike Gold Exchange Traded Funds (ETFs), the bond will not be backed by gold but by a sovereign guarantee. The investors will get interest on the gold bond at 2.75 per cent which will be subject to tax and on maturity will get the prevailing value of gold at that time.

According to market experts, a successful launch of the sovereign gold bond scheme may ensure that physical gold is used mostly for manufacturing jewellery and sovereign gold bond for investments.  Investors of gold bars or coins may find gold sovereign bonds a better investment than holding a physical stock because it will offer the benefit of gold without any handling and storage costs. It will relieve investors of the need to check the quality of gold and with valuation, no longer an issue, these bonds will be easier to use as collateral. In case of a gold bond, the counterparty is the government of India. If the price of gold increases, the government takes the risk of higher prices, if they fall, the investor would be given an option to roll over their holdings for an additional period.

On the other hand, Sunil Sinha, principal economist, India Ratings & Research believe that the sovereign gold bonds are beneficial only if it is bought for investment purposes. As the bonds will be issued in denominations of 2g, 5g, 10g of gold, a minimum investment required would in the range of Rs 5,000 and above. This means small investors will not be able to take advantage of this scheme unlike the case with gold exchange traded funds or gold mutual funds. In case of sovereign gold bonds, both upside gains and downside risks will be with the investor. However, in case gold prices fall, losses from a systematic investment plan in gold exchange traded funds or gold mutual funds will be lower than for lump sum investments in sovereign gold bonds.

Chirag Mehta, senior fund manager, alternative investments, Quantum AMC said Sovereign Gold Bond is a good alternative but he believes the following four issues will run through investors mind while taking decision to invest in them:

1. First and foremost, the liquidity aspect. If I need to sell these bonds before maturity will there be enough liquidity on the exchanges where they are proposed to be listed

2. Pricing of the bonds may be an issue – Like for the current bond being announced, the price for the bond is fixed at Rs 2,684 per gram for 999 purity. However, the current rate of gold is lower than the issue price and therefore make investors think about over paying. The pricing for the bonds should be dynamic i.e. investors get the price on the day of investment or the price on the allotment day – this will help resolve this issue

3. There is a cap of 500 grams and therefore investors wanting to invest more in bonds will not be able to do so.

The interest on the bond will be paid on investment value. Even, if the gold prices move up, the yield will be calculated on investment value and not on the mark to market value. Therefore, the yield calculated from the prevailing market price may turn out to me lower than the mentioned 2.75 per cent in the event gold prices have moved up.

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