Ahead of Akshaya Tritiya, a day when people in India consider it auspicious to buy gold, the government has launched the first tranche of Sovereign Gold Bond Scheme (SGB) for the current financial year. The subscription is open till April 24, 2020. The value of the bond is Rs 4,639 per gram of gold, and investors who apply online and pay via digital mode will get a discount of Rs 50 per gram on the value.

While the stock markets have seen a sharp fall since the outbreak of COVID-19 pandemic—the 30-share BSE Sensex has fallen 26% since January this year, gold has generated 20% returns (in rupee terms) during the same period. Analysts say investors should buy small amounts of bonds in each tranches and hold on till maturity to get tax-efficient returns.

A research note by Validus Wealth says that gold provides diversification in a portfolio and is often correlated with the stock market during risk-on periods, while it decouples and becomes inversely correlated during periods of stress. “This is unique amongst most hedges in the marketplace, because it ensures investors get the best of both worlds,” it underlines.

Invest in Sovereign Gold Bonds
The minimum investment in SGB will be one gram and the maximum limit of subscription per fiscal year will be four kilograms for individuals and Hindu Undivided Family, while for trusts it is 20 kg. For investors, SGBs are a better way to invest in the metal as the investment earns an interest of 2.5% per annum payable semi-annually apart from the appreciation in the value of the yellow metal. As SGBs pay interest, returns are higher than gold ETFs or physical gold. Golf ETFs deduct fund management charges (0.5-1%) and physical gold levy making charges.

The tenor of the bond is eight years and the buyer will have an exit option from the fifth year which can be exercised on the interest payment days. An investor does not have to pay any charge for buying SGBs in the primary market. However, if one buys these bonds from the secondary market, then one has to pay one-time brokerage.

Regarding taxation, if the SGBs are held till maturity, then the investor will not have to pay any capital gains tax. However, if they are traded before maturity, short-term and long-term capital gains tax will be applicable. The interest on SGBs is taxable. In both physical gold and Gold ETFs, short-term and long-term capital gains tax are applicable. The bonds can be used as collateral for loans. The other tranches during the first half of this financial year will be from May 11-15, June 8-12, July 6-10, August 3-7 and August 31-September 4 and the nominal value of these tranches will be fixed accordingly.

Why invest in gold?
Gold is a natural hedge against uncertainty and helps an investor’s portfolio get through a recession. Chirag Mehta, senior fund manager, Alternative Investments, Quantum AMC, says that unlike equities, gold does not require a business to keep it afloat. “Gold’s value is not dependent on revenues and profits. This makes holding gold imperative during an economic downturn when stocks are hit by losses due to a deteriorating economy,” he says.

An individual can choose from different types of gold investment products such as physical gold (bar and coin), digital gold, Gold ETFs, Gold Funds and SGBs. While Gold ETFs score over SGBs in terms of liquidity, the former is trading at a premium to net asset values now because of supply disruption due to the lockdown.

While investment in gold is a useful diversification tool, analysts suggest an investor should not allocate more than 10 to 15% of his total portfolio to the metal.

While most Indians prefer to invest in the precious metal in the physical form, SGB is a convenient option to purchase gold during the lockdown period from the comfort of your home for Akshaya Tritiya or Akha Teej, when buying gold is said to bring good fortune.