While Sovereign Gold Bond investors benefit from 2.5% interest every year, liquidity remains an issue as the bonds can’t be redeemed before five years and the secondary market is not liquid enough
The government has has launched the fifth tranche of Sovereign Gold Bond Scheme (SGB) for the current financial year. The subscription is open till August 7 and the next tranche will be from August 31-September 4, 2020. The value of the bond for the current tranche is fixed at Rs 5,334 per gram of gold and investors who apply online and pay via digital mode will get a discount of Rs 50 per gram.
The yellow metal’s prices have run up sharply in recent months-the value of the bonds in the first tranche (April 20-24) for FY 2020-21 was Rs 4,639. Over the last one year, gold prices have moved up 50%.
Analysts say individual investors should buy small amounts of bonds in each tranche and hold on till maturity to get tax-efficient returns. However, investors must keep in mind that the total allocation in the yellow metal should be 10-15% of portfolio. So, if an investor has around 10% allocation to the yellow metal, then at this price level, he should not rush to invest much.
Long holding period for SGBs
The tenor of SGBs 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. Analysts say SGBs are the most optimal investment vehicle if the investment is held till maturity. As liquidity is a constraint, those who want to do strategic asset allocation may invest through SGB. But those who do not want to hold investment till maturity should invest in gold exchange traded funds (ETFs).
On the liquidity front, Gold ETF scores over SGBs. Investors can buy and sell gold ETFs during any working day of the stock exchanges. It is the most optimal investment vehicle from a liquidity perspective. However, SGBs are not that liquid. While the bonds are traded on the exchanges if held in demat form, liquidity is very limited as there are not too many buyers.
On other features SGBs score well
In fact, 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. As SGBs pay interest, returns are higher than gold ETFs or physical gold. Gold ETFs deduct fund management charges (0.5-1%) and physical gold levy making charges. However, both SGBs and gold ETFs are providing capital appreciation or depreciation.
Even on taxation, SGBs score over gold ETFs if held till maturity. An investor does not have to pay any capital gains tax if held till maturity. However, if they are traded before maturity, short-term and long-term capital gains tax will be applicable. In ETFs, if held for more than three years, an investor will have to pay long-term capital gains tax at 20% with indexation and short term capital gains tax, if sold before three years, will be applicable at the investor’s marginal rate.