Sovereign Gold bonds, time to rebalance your portfolio

Sovereign gold bond is an opportunity to buy gold, get regular cash flow and exemption from capital gains if held till maturity. This investment opportunity gives you a chance to earn from your gold investment.

August 30, 2021 11:05 IST | India Infoline News Service
Sovereign Gold bond
The equity markets spectacular run is on account of the recovery in corporate earnings, positive management commentary and expectations of higher growth ahead. However, valuations remain stretched, as high global liquidity results in money chasing growth asset higher. The US Fed is likely to begin reducing liquidity (tapering) towards the end of 2021. This could result in pull back in riskier assets as cost of money rises. Hence current period could be an opportune time to re-balance portfolio and move funds towards safer avenues such as gold. SGB are the most efficient way to add gold in your portfolio.

Sovereign gold bond is an opportunity to buy gold, get regular cash-flow and exemption on capital gains if held till maturity. This investment opportunity gives you a chance to earn from your gold investment.

The RBI on behalf of Government of India has come out with its latest issue of Sovereign Gold bond (SGB) – Series VI which is available between Aug 30-Sep 3, 2021. One bond is equivalent to 1 gm of gold, priced at Rs4732/- while if you apply online, you get a discount of Rs50 at Rs4682/- per gm.

Gold is precious!

Let us understand the lifecycle of gold from a consumer point of view

You go to a jeweller – Select a pattern - Pay per Gram + Making Charges + GST – Wear a few times – Keep in locker most of the time – Pattern is out dated – Sell it to Jeweller – He deducts some money for dirt accumulated or other innovative reasons – You select new design – He bills you per gram + making charges + GST – Wear a few times – Cycle repeats!!

Thus you always end up paying – Making Charges + Locker Charges + GST & never get market price on sales.

Sovereign Gold bond is the only investment option which pays you for holding Gold, at a fixed rate of 2.5% p.a. every six months. No TDS.

The pricing is transparent, simple average of last 3 working days, both when you buy and at redemption on maturity.

You are issued a certificate if held in physical form or in electronic form, simply reflects in your demat account like a stock.

The bond has a tenure of 8 years, can be exited any time by selling on exchange if held in demat mode, or can be returned to your bank/broker/post office after completion of 5 years.

Zero capital gains tax is applicable if held to maturity. You get indexation benefit if sold via the exchange after 3 years. No STT applicable. So very tax efficient.

Price of gold has risen from roughly Rs.2700 per gm in Aug 2018 towards 5K in Aug2020, and hence is giving good entry opportunity to buy at 4682/gm today. The factors which can push gold prices higher are in place in the form of inflationary pressures, asset prices moving up sharply and high speculative interest in freshly created alternative investments. This builds a fertile ground for safe haven asset such as Gold. Remember, capital gains on Sovereign Gold bonds at the time of maturity are tax free!

Bonds are denoted by 999 purity. So no risk of impurity. Banks easily give you a loan, if you have gold as collateral. Bank gold loans have increased 82% YoY to Rs. 60,464cr as of March 2021 compared to Rs. 33,303 crore in March 2020. Individuals and small business owners have used gold loans to survive difficult time due to pandemic. The SGBs can be given as security to get a loan, and is treated at par with gold jewellery. The RBI had increased the Loan to value of gold loans from 75% to 90% till March 2021 to help the public, reflecting the importance and liquidity gold provides at times of crises.

Thus Sovereign Gold bonds are the best investment as far as gold investment is concerned. Safety + Security + Capital gains + Fixed 2.5% p.a. extra, truly makes SGB’s gold se badhkar!

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