Gold is falling; are sovereign gold bonds better?
PremiumOn bullion outlook, experts believe that gold is expected to stay range-bound in the first few months of the year
The first issue of sovereign gold bonds (SGBs) of 2022 opened on Monday. The SGB Scheme 2021-22-Series IX will remain open for subscription till 14 January. As per the Reserve Bank of India (RBI), the nominal value of the bond has been kept at ₹4,786 (one unit of sovereign gold is equal to 1 gram of gold).
The government of India and RBI have decided to offer a discount of ₹50 per gram to those investors applying online. The scheme has been a huge success for the government as it has managed to raise over ₹32,000 crore since its inception in 2015.
On bullion outlook, experts believe that gold is expected to stay range-bound in the first few months of the year. “However, long-term investors will have the last laugh as a hasty taper could hurt growth and trigger market tantrums making investors seek portfolio diversifiers like gold," said Chirag Mehta, fund manager-alternative investments, Quantum Mutual Fund in a note recently.
Currently, gold prices are trading near two-month lows at around ₹47,300 levels and are almost ₹9,000 down from their peak witnessed in 2020. The weakness is mainly due to the minutes of the US Federal Reserve that indicated a faster rate hike and also a reduction in bond buying than earlier estimated.
Experts believe that SGB is an efficient way for investors looking to take exposure in gold. “There is no storage cost and taxes as is the case in buying physical gold. Paper gold has a higher redemption value and can be easily used to take loans against it. SGB comes with a 2.5% coupon attached and tax advantage for its investors," said Nish Bhatt, founder and chief executive officer, Millwood Kane International, an investment consulting firm.
Despite, positive long-term outlook, some experts believe that investors should stay away from gold bonds at this point of time.
“Compared with the current gold rate, the issue price seems to be on the higher side. We expect that gold prices may go further down, so it is better to wait in SGBs now," said Anuj Gupta, vice president—Research, IIFL Securities.
According to financial advisers, while gold is a good diversifier, investors should not go overboard on this asset class.
“Gold as an asset class can be in everyone’s portfolio in the range of 5-10%. Within gold, whether it is physical gold, coins, ornaments or SGBs, I will say SGB is better, as investors will be getting tax-free returns if they stay invested up to the full term," said Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners.
Joseph’s advice for investors is to keep adding to SGBs with each issue. “This way you will have a decent exposure and a good diversified portfolio with better returns," the expert added.
Gold bonds have a maturity period of eight years. So, in case you buy gold bonds and hold them till maturity, the capital gains will be tax-free. Premature withdrawal is also possible from the fifth year onwards.
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