Sovereign Gold Bonds see surge in interest in FY21
Sovereign gold bonds are loved in India for a number of reasons. Firstly, the principal is guaranteed by the Indian government. Secondly, it pays 2.5% interest annually, the only gold vehicle with an assured return. Lastly, the sovereign gold bonds are exempt from capital gains held till maturity (7 years to 8 years). It is these unique features that have made SGBs an attractive investment bet.
SGBs: How about comparing apples with apples?
One argument could be that trends get built up over a period of time and so it may not be appropriate to just single out this particular fiscal as a star performer in terms of gold investment flows. To remove that bias, let us compare the SGB collections of the first six SGB series over last four fiscal years.
Is the gold rush evident in gold ETFs too?
Gold ETFs are also a vehicle to look at gold as an investment but the nature of the product is slightly different from Sovereign Gold Bonds (SGBs). Gold ETFs have no principal guarantee by the government or any fixed interest assured. Gold ETFs are market-driven products linked to the price of gold. Gold ETFs score because they are simpler in terms of purchase, liquidity and availability. If you have a demat account, you can buy and sell gold ETFs on the NSE or BSE like any other stock. These gold ETFs are liquid so you are not locked in like in the case of SGBs. Lastly, you don’t have to wait for a specific series or issue because gold ETFs are available round the year at market-linked prices. But, have gold ETF flows also seen resurgence in FY21 like the SGBs?
Here is what explains the gold rush in India
There are 3 broad reasons for the big gold rush in the Indian context.
a) Investors, financial planners and portfolio advisors are increasingly beginning to see the merits of making gold an essential part of asset allocation. Apart from enhancing returns, gold has also reduced risk due to low correlation with other asset classes.
b) In volatile market conditions, especially with trade war, COVID and the volatile border situation; investors prefer areasonable allocation to gold. It is also expected to offer protection wheneconomic growth falters or inflation shoots too high.
c) Last, but not the least, there is a fundamental shift happening because finally Indians are discovering their predilection for non-physical gold. With its advantages like simplicity, liquidity and convenience, gold is now much more than its physical lustre.
For now, the good news is that the gold rush is for real as Indians discover the merits of gold as an investment.