Should you buy the new tranche of Sovereign Gold Bond (SGB)? Kirtan Shah decodes
5 min read . Updated: 08 Mar 2023, 04:04 PM IST
Premium- The Reserve Bank of India (RBI) launched the last tranche of Series IV of its Sovereign Gold Bond Scheme 2022-23 on March 6 (Monday) subscription.
The Reserve Bank of India (RBI) launched the last tranche of Series IV of its Sovereign Gold Bond Scheme 2022-23 on March 6 (Monday) subscription. This will be available for subscription until March 10. The RBI has set the issue price of SGB at ₹5,611 per gram in comparison to an issue price of ₹5,409 per gram priced in December 2022. In an effort to educate investors on whether they should purchase SGBs or not, Kirtan A Shah, founder of Credence Wealth Advisors, provided investment advice via Twitter.
Kirtan A Shah said in a Tweet “Should you buy Sovereign Gold Bond (SGB)? If yes, should you buy the new tranche at 5561 or some older listed tranche & which one of the 62 tranches issued so far & why? A detailed."
First lets understand why SGB over all the other options, according to Kirtan A Shah
(1) Physical Gold – Buying gold from your friendly jeweler
1) Pro
(i) Tangible (You can touch it)
(ii) Buy in cash, confidentiality, difficult to trace
(iii) No maximum limit on buying
(iv) Highly Liquid
2) Cons
(i) Storage/Theft
(ii) Purity (Cheating)
(iii) Making Charges (upto 35%)
(iv) Taxation vs SGB is unfavorable
(v) GST – 3% on selling gold
(vi) Inconsistency of pricing across sellers & unfavourable rates vs traded gold
(vii) No regulator
3) Taxation
(i) STCG – Less than 3 years, added to your over-all income and taxed at slab rates
(ii) LTCG – More than 3 years, 20% tax with indexation advantage
Suggestion – Avoid, said Kirtan A Shah.
2) Digital Gold – Buying from Fintech platforms – PayTM, Google Pay, Phone Pay, Safegold, MMTC, Augmont Gold
Pro
(i) Buy as low as Re. 1
(ii) Purity – Generally wont be a problem
(iii) Storage – You don’t have to bother
(iv) Instant credit on selling
Cons
(i) GST – 3% (You buy 1000 rupees of gold, you get 970 worth of gold)
(ii) Spread – High difference between buy and sell price (another 2-3% for storage, insurance & trustee fees)
(iii) Absence of regulator
(iv) Maximum holding period - MMTC investors will have 2 mandatorily take delivery or sell the gold purchased after 5 years or will have to pay extra charges, if the delivery is not taken
(v) Taxation vs SGB is unfavorable same like physical gold
Suggestion – Avoid, said Kirtan A Shah.
3) Gold ETF – Buying through Mutual Funds
Pro
(i) Buying at market value
(ii) Minimum – Rs. 50 & Maximum – No limit
(iii) Storage & Purity – You don’t have to bother
(iv) No GST
(vi) Physical delivery possible
(vii) Liquidity – T+1
(viii) Regulator - SEBI
Con
(i) Taxation vs SGB is unfavorable, same as physical gold
(ii) Tracking error - actual returns may be slightly lower than the index
(iii) Expense ratio - actual returns may be slightly lower than the index
(d) Suggestion – Better than Physical & Digital gold
4) Sovereign Gold Bond (SGB) – Buying through RBI on behalf of the central government
Pro
(i) Issued at a discount - Current tranche is at 5561 vs the current market price of 5611
(ii) Storage – You don’t have to bother
(iii) No GST
(iv) 2.5% interest paid by the government every year
(v) Taxation – No capital gains tax if you buy during the launch or from the secondary market & hold it till maturity. But the 2.5% interest is taxed at the slab rates.
(vi) Sovereign guarantee
Con
(i) Not backed by physical gold purchase unlike in digital gold & ETF where gold is actually bought. But there is sovereign guarantee.
(ii) Minimum – 1 gram, Max – 4 Kgs
(iii) No physical delivery
(iv) Liquidity – Its an 8 year product. If you want to sell before 5 years, your selling price is the secondary market determined price which is typically at a discount because of lower liquidity & current yield (will explain ahead)
Suggestion - Best product to invest in, said Kirtan A Shah.
5) But should we apply for the new issue or buy the old tranches listed on the exchange?
So far 62 SGB issues have come excusing the new one. We have looked at all the 62 issues & all of them are trading at a 1 - 5% discount to the 5561 price at which the new issue it launched
While selecting which one should you invest in out of the 62 old & the new 63rd one, you have to look at either,
(a) Discount available to the new issue- It’s a no brainer that the bonds available at the highest discount is the one you should choose but there are such ~40 bonds trading ~ 5% discount & hence you look at the current yield or YTM to make the final decision.
(b) Current Yield of the old issue- If you look at the 2020-21, Series VI, September 8, 2020 Bond, Issue Price - ₹5117 Interest Payable = 5117 * 2.5% = 128 (Irrespective of the price at which you buy, 2.5% is payable on the issue price). Current Market Price = 5284.
(c) Yield to maturity (YTM)- Current Yield = Interest payable / Current Price,= 128/5284 = ~2.5%. So if I buy this bond from the market at 5284, I will still receive the interest of 128 which is ~2.5% which even the new issue pays.
So not only that I get it at a discount of ~5% in the secondary market but also make the yield of ~2.5% vs
(a) Buying the new tranche at 5561 (premium of 5%) + 2.5% yield or
(b) buying something at a 5.33% discount but making a 2.28% yield for the remaining 7-8 years, said Kirtan A Shah via a Tweet.