Sovereign Gold Bonds (Series IV): Should you invest in SGB when gold prices are at all-time high?

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Updated: Jul 10, 2020 3:59 PM

If you are planning to invest in Sovereign Gold Bonds, then you need to hurry up as the 2020-21 Series IV of the Sovereign Gold Bonds (SGB) scheme is going to close for subscription today.

gold, gold bond, Sovereign Gold Bonds, SGB, Sovereign Gold Bonds 2020-21 Series IV, should you invest in gold bond, gold ETFs, gold mutual fundsIf you miss the deadline, you can still purchase SGBs from the secondary markets.

If you are planning to invest in Sovereign Gold Bonds, then you need to hurry up as the 2020-21 Series IV of the Sovereign Gold Bonds (SGB) scheme is going to close for subscription today, because the scheme had opened for subscription between July 6 and July 10, 2020 with the settlement date being July 14, 2020.

As per an RBI notification issued in April this year, subscription for the gold bonds may be made in the prescribed application form (Form A) or in any other form as near as thereto, stating clearly the grams (in units) of gold and giving the applicant’s full name and address. Every application must be accompanied by the ‘PAN details’ issued by the Income Tax Department to the investor(s).

However, despite the attractiveness of the SGB scheme, the question arises: Should one invest in Gold Bonds when gold prices are at an all-time high?

Financial experts say the RBI-issued Sovereign Gold Bonds are one of the best investment instruments in the coveted yellow metal. The current tranche for SGBs (Series IV FY20-21) can be subscribed until July 10, 2020, at the price of Rs 4852 per gram of gold, and the same will be issued to the subscribers on July 14, 2020. Significantly, online subscribers who pay digitally can benefit from a Rs 50 discount per gram of gold, so that is something that should be kept in mind.

“If you miss the deadline, you can still purchase SGBs from the secondary markets. Freedom from concerns over purity and storage, a 2.5% p.a. interest during the holding period over and above the appreciated price of gold, and no capital gains tax on redemption make SGBs a smart investment choice which can be better than physical gold investments or even gold ETFs and gold mutual funds,” says Adhil Shetty, CEO, BankBazaar.com.

Prathamesh Mallya, AVP – Research Non Agri Commodities and Currencies, Angel Broking Ltd, says, “In times of uncertainty, gold is one of the major asset classes that an individual should invest in. Moreover, the lockdown is one of the situations that mankind has never faced in history and that also for more than 4 months now. Those who purchase gold in India, do it majorly in physical form, however, the situation has been dire for gold consumers at this point. Hence, SGB’s or Sovereign Gold Bonds introduced by the Government of India are a good option to stay invested in gold for a fairly long period of time.”

Some industry experts, however, are of the opinion that although one can consider buying Gold Bonds in order to hedge one’s portfolio, but should not expect the same kind of returns going ahead.

Pranjal Kamra, CEO, Finology, says, “Though gold has delivered outstanding returns in the last one year and has outperformed the Sensex with a substantial margin, it should not be considered as pure investment grade as the value is primarily driven by people’s sentiments towards other asset classes. Amid the economic uncertainty across the world, one must be careful about the downside risk in the portfolio and diversification is important. Thus, you can consider buying Sovereign Gold Bonds in order to hedge the portfolio, but with the current price of gold, which is at all-time high, you definitely cannot expect the returns that it has delivered over the last six months in the near future.”

Need to diversify investment portfolio

Whatever you do, your investment portfolio should be optimally diversified to be strictly in line with your returns expectations, risk appetite, and liquidity requirements. Skewing it towards one particular asset class, including gold, is unlikely to achieve this.

“As such, you mustn’t go overboard with your gold investments and invest more than your requirements as prices of gold tend to flat-line for long periods of time despite the recent growth in prices. I would, however, suggest limiting your gold investments to a maximum of 10% of your portfolio’s value should be ideal,” advises Shetty.

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