New sovereign gold bond tranche a good option for long-term hedging

NEW DELHI:  If you have an affinity to invest in gold as the preferred method of hedging long-term risks to your portfolio, the government’s Sovereign Gold Bond (SGB) scheme is one of the most cost-effective ways of doing so. The seventh tranche of the SGB opens for subscription Monday with a fixed issue price of Rs 5,051 per gram (or Rs 5,001 per gram if you choose to invest digitally), but picking up these bonds may not be the best option for all.

For one thing, these are relatively long-term commitments. The SGB has a maturity period of 8 years, with an exit option becoming available after five. The redemption price will also depend on the prevailing gold price at maturity. While one can trade SGBs on the bond/stock markets at any point, selling them before maturity may fetch significantly lower returns if there isn’t much demand at the time. If liquidity is a prime concern, then analysts note that gold Exchange Traded Funds are better options.

However, SGBs have certain advantages that pay off quite well if one holds on for the full eight-year tenure. First, SGBs provide a steady income in the form of a 2.5 per cent annual interest rate, on the nominal value, paid by the government twice a year. Depending on the amount invested, accumulated interest could turn out to be a tidy sum on its own. 

Far more attractive is the tax exemption on capital gains. This means that while interest is taxed at the relevant slab, any capital returns you make at redemption is completely tax free. And like other financial gold instruments, SGBs do not have the wide range of service charges that come with buying and selling physical gold. But, how attractive is the upcoming issue? First, the  issue price is lower than that of the previous series: August 3-7 (Rs 5,334 per gram) and  August 31-Sept 4 (Rs 5,117 per gram). However, the price of some of the previous SGB series is much lower on the secondary markets, with SGB 2020-21 Series I bonds trading at Rs 4,800 per gram on Friday.