The 7th Pay Commission salary hike and arrears are expected to be credited to government employees from September 1, coinciding with the launch of the 5th tranche of the Sovereign Gold Bonds (SGBs).
The 5th tranche of the government’s Sovereign Gold Bonds (SGBs), which opens for subscription on Thursday, appears to have been timed to tap into the additional money that would flow into the hands of central government employees’ on account of the 7th Pay Commission hikes.
The salary hike and arrears are expected to be credited to government employees from September 1, coinciding with the launch of the 5th tranche of the SGBs. The 5th tranche of SGB will be open for subscription from September 1-9. The issue price has been set at Rs 3,150 per gram of gold, against Rs 3,119 per gram for the 4th tranche which closed on July 22..
Some of the additional funds in the hands of central government staff is expected to find its way into gold, and the Soverign Gold Bonds could be a good proxy for physical gold with several advantages associated with the government’s offering. In fact the government is soliciting investment in the 5th tranche by reminding in its promotion that the SGBs are ‘a golden opportunity for Government employees to invest.’
As per the 7th Central Pay Commission hikes, there will be a 23.5 per cent increase in salaries and allowances. However, the treatment of the allowances component will be known after a government panel forms its view over the next few months. Arrears will be paid with effect from January 1, 2016, with payments to be completed within the current financial year itself.
Financial planners advise gold to be part of one’s portfolio but in measured quantities which could range between 8-10 per cent of overall investments. Sanjeev Govila, CEO, Hum Fauji Initiative advises limiting gold holding (which could include SGBs) to 10 per cent of the overall portfolio. “I would advise a maxium of 10 per cent gold holding in one’s portfolio. Gold has risen sharply due to global uncertainties. However, the buying rush has also made yellow metal volatile,” Govila said.
At the turn of 2016, domestic gold price stood at around Rs 25,070 per 10 gram, while it closed at Rs 31,095 per 10 grams on August 31, showing a 25 per cent gain. Gold is expected to hit Rs 35,000 levels in the coming months on account of festival buying and the marriage season to follow. In the long run too gold prices are expected to remain firm on global uncertainties that were triggered by Brexit and slowdown in world economies.
Anil Rego, founder and CEO, Rights Horizons advises a slightly lower cap of 8 per cent for gold holding. “High exposure to gold may increase portfolio volatility. Government employees who would receive increased pay from the 7th Pay Commission recommendations should be careful and limit their gold holding to around 8 per cent of their portfolio,” Rego told FeMoney.
SGBs are a good alternative to physical gold. While the instruments carries zero risk because of government guarantee, it is also exempt from capital gains tax. SGBs can also be used as collateral to avail loans from banks. Bondholders will also be paid 2.75 per cent interest, payable half yearly. The bonds are available in both demat and paper form.