Latest tranche of SGBs offers good entry price to long-term investors

Avoid them if you might require liquidity in the near term as you may have to sell them at a discount on the exchanges

A fresh tranche of the Reserve Bank of India’s (RBI) Sovereign Gold Bonds (SGB) Scheme 2021-22 is now open for subscription and closes on October 29. The price is Rs 4,765 per gram of gold. It comes with a Rs 50 per gram discount on the nominal value if bought online. And although the price of gold is below the peak level of August 2020, demand for the precious metal is rising due to pre-Diwali shopping. Should you also take the plunge?

Gold outlook

Experts are cautiously optimistic on gold. MCX Gold has fallen 7.1 per cent between Diwali 2020 and now. Gold had given a return of 20 per cent between Diwali 2018 and Diwali 2019, and 34.5 per cent between Diwali 2019 and Diwali 2020, amid the rise in risk-off sentiment.

Naveen Mathur, director, Commodities and Currencies, Anand Rathi Shares and Stock Brokers, says, “Now, the world economy is better prepared to face the Covid-19 situation. The US Federal Reserve and the European Central Bank (ECB) may soon start tapering of pandemic-era stimulus support as economic activity is recovering rapidly.”

The safe-haven investment demand for gold has fallen significantly with holdings at the SPDR Gold Exchange Traded Fund (ETF) down from 1,170 tonnes on January 1, 2021 to 978 tonnes on October 22, 2021. SPDR Gold ETF is the world’s largest physically backed gold ETF.

Mathur says, “The price of gold may cool down. However, retail participation can be a positive trigger. India imported 91 tonnes in September compared to 12 tonnes during the same period a year ago due to the upcoming festival demand. Ahead of Diwali, we expect increasing footfalls in jewellery shops to underpin the price of the yellow metal.”

Moreover, China is struggling with a real-estate crisis. It is also facing a resurgence of Covid-19 Delta variant. Mathur adds, “Investors may rush to buy a safe-haven asset like gold in the near future.”

Shravan Sreenivasula, executive director, Investment Solutions Group, Avendus Wealth Management, says, “We have a constructive view on gold from a medium to long-term perspective. Real rates could be negative for a few years due to stubborn inflationary pressures. Sub-optimal economic growth may lead to incremental fiscal and monetary support, leading to debasement of currencies.” Gold is a proven long-term hedge against inflation.

Returns and taxation

Apart from the usual price appreciation, SGB also offers annual interest at 2.5 per cent per annum on the value of investment. Investment in SGBs also comes with benefits such as saving in storage cost and making charges.

Ashok Shah, senior partner, NA Shah Associates, says, “If someone is considering a long period of investments, SGB would be a better investment than physical gold on account of the assured 2.5 per cent per annum return and no tax on capital gains arising at the time of redemption of SGB.”  

Where to buy

SGBs are sold through regular banks, designated post offices, and recognised stock exchanges like the National Stock Exchange and BSE. Mathur adds, “SGBs are traded in the secondary market and can be sold before maturity. However, liquidity is low right now.”  

It's possible that older tranches of SGBs may be trading on the exchanges at a lower price due to low liquidity. If you get an opportunity to buy an older tranche SGB at a lower price, you may do so. For instance, SGB August 2024 Tr-IV was trading at Rs 4,701 on October 25. Sreenivasula says, “Prices on the exchanges depend on supply and demand. Usually the trade at a discount. However, the volume traded is not much. Retail investors could get the desired quantity they would want to purchase, but it may not suffice for high net worth individuals.”

Experts are advising investors to invest in this series of SGB due to lower rates and expectations of good returns. Suresh Sadagopan, founder of Ladder 7 Financial Advisories, says, “One needs to have an appropriate allocation in gold and it is best done through SGB. A 5-10 per cent strategic allocation in a portfolio for the long-term is a good idea.” Investors should use the current correction to build this allocation.
 

No capital gain tax if SGBs are held till maturity

·       Interest income from SGBs is taxable at the tax rate applicable to the taxpayer

·       No capital gain tax has to be paid on redemption value if SGBs are held till maturity

·       If a SGB is held for more than 36 months, gains arising on transfer are regarded as long-term capital gain (LTCG)

·       LTCG is taxed at 20 per cent with indexation

·       Short-term capital gain is taxable at the tax rate applicable to the taxpayer

Source: NA Shah Associates