Here’s What Investors Need To Know About The Sovereign Gold Bond

The first of six tranches of the government’s sovereign gold bond is open for subscription till Friday. Gold, a safe haven, has outperformed other assets amid the uncertainty caused by the Covid-10 pandemic.

But what is a sovereign gold bond? And should investors subscribe? Here’s what you need to know.

Sovereign Gold Bond Explained

Sovereign gold bonds are tradable government securities with prices linked to the value of the underlying asset—that is gold. They are issued by the Reserve Bank of India on behalf of the government.

The bond issue is priced at the average closing price of gold of 999 purity— published by the India Bullion and Jewellers Association—in the last three working days of the week preceding the subscription.

These bonds also offer an interest of 2.5 percent annually, paid semi-annually. The tenor is eight years but it offers an exit option after the fifth year—available on the day of interest payment.

On maturity—after eight years—investors can redeem the bond at the average price of gold in the three preceding days. The interest payments, however, will be made on the face value.

The bonds can be bought through scheduled commercial banks, the Stock Holding Corporation of India, the National Stock Exchange and the BSE. The minimum amount is equivalent to a gram of gold and the maximum is 4 kg.

The sovereign bonds offer a tax incentive. The capital gains arising from the appreciation in gold prices is tax free. The interest, however, is taxed at the relevant income slab.

Details Of The Issue

There will be six tranches of the latest sovereign gold bond over the course of this year. The next one opens for subscription between May 11 and May 15.

The ongoing tranche has been priced at Rs 4,639 per gram, based on the average price of gold in the second half of the previous week. Those applying online and making a digital payment will get a discount of Rs 50 per gram.

The issue date is April 28.

The Expert View

The new coronavirus pandemic and the lockdown have brought economic activity to a slow grind, prompting furloughs and pay cuts, and job losses across sectors.

“In the current situation, survival becomes most important,” said Kiran Telang, certified financial planner and SEBI-registered investment adviser. “At the moment, the priority should be liquidity. If you don’t have liquidity, you shouldn’t be looking at any investments, be it gold, debt, or equity.”

In fact, Telang said those employed in sectors more vulnerable to disruption should keep a larger amount than usual in their contingency funds.

If availability of funds is not an issue, Telang advises investors to first consider asset allocation. Financial planners generally recommend that gold should not account for more than 10 percent of a portfolio.

“There is recency bias based on how the equity markets have performed. People are saying that gold is a safer investment but that isn’t the way to look at it. You don’t dig a well because there’s a fire,” said Telang. Looking at point-to-point returns at this juncture will serve no purpose and rather, investors should study rolling returns, which still favour equity investments and even dynamic asset allocation funds, she said.

Gold, considered a safe haven asset, started rising last year amid uncertainty triggered by the trade war between the U.S. and China and buying by central banks across the world. Amid disruption by Covid-19, according to India Bullion and Jewellers Association data, it’s jumped more than 16 percent so far this year.

“There are two or three ways to look at it,” said Suresh Sadagopan, certified financial planner and founder of Ladder7 Financial Advisories. “When people want to invest in gold, it should be strategic, and must part of long-term asset allocation. People shouldn’t invest because gold is going up. If they don’t have gold in their portfolio, they can go up to 10 percent.”

Sadagopan cautions against jumping headlong into the gold bond issue, at least for the next two months. Once things settle down, the opportunity will still be there because there will be additional tranches over the year, he said. If an individual has a fair amount of money and is looking to correct a discrepancy in their asset allocation, the gold bond is a better option than the gold ETF, jewellery, or even bullion, Sadagopan said.