 "Investors might give gold bonds a miss")
In the past few days, your bank would have sent an e-mail requesting you to invest in the latest tranche of gold bonds. The third tranche, launched on Monday, has been priced at Rs 2,916 per gramme.
Gold bonds are perfect for people who have traditionally bought gold in the physical form. The government has made them attractive by offering an interest rate of 2.75 per cent of the initial value.
This time, however, things are slightly different. The first tranche came at Rs 2,684 per gramme. Due to the sharp rise in gold prices, the cost to the buyer will be 8.6 per cent higher this time. These bonds have a tenure of eight years. Investors may exit from the fifth year of the dates when interest payments are made.
Scenario one: You are a compulsive gold buyer. Many investors buy a small gold coin or trinket every month because they seek safety in gold. For them, gold bonds are a good buy as they are cheaper than coins, which cost more than Rs 3,200 per gramme. Even a small piece of jewellery includes making charges.
Scenario two: You want to make your gold exposure tax free. If your investment in gold exchange-traded funds has completed three years, you may exit and invest in bonds. Union Budget 2015 had made exchange traded funds (ETFs) unattractive by increasing the tenure for availing indexation benefit from one to three years. Exiting in the interim leads to taxation according to the income-tax slab. “As Budget 2016 has made capital gains on these bonds tax-free, investors can move from ETFs to bonds,” says a financial planner.
Scenario three: You are bullish on gold prices. This view doesn’t enjoy strong support. Says Naveen Mathur, associate director, commodities and currencies, Angel Broking: “Gold prices have gone up recently due to problems in China, weakness in dollar index and uncertainty. I expect gold prices to stabilise in the range of Rs 29,000-30,000 per 10g.” He believes there may not be a substantial rally in the near future.
The government has provided some cushion to investors in the form of an annual interest payment. But the benefits aren’t substantial. If prices decline, investors will get a small benefit from the fixed annual interest payment. For example, one bond priced at Rs 2,916 would fetch an annual interest income of around Rs 73. If the price of gold goes up to Rs 5,000 per gramme, interest income would be steady but yield would fall to around 1.4 per cent. Conversely, if gold prices fall to Rs 2,000 per gramme, yield would rise to 3.73 per cent. But, there would be loss of capital if prices slid sharply.
Mathur believes buying bonds in this tranche might not earn much capital appreciation as entering at lower levels would mean better returns. Investors can afford to give this tranche a miss.
Gold bonds are perfect for people who have traditionally bought gold in the physical form. The government has made them attractive by offering an interest rate of 2.75 per cent of the initial value.
This time, however, things are slightly different. The first tranche came at Rs 2,684 per gramme. Due to the sharp rise in gold prices, the cost to the buyer will be 8.6 per cent higher this time. These bonds have a tenure of eight years. Investors may exit from the fifth year of the dates when interest payments are made.
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Financial advisors like Kartik Jhaveri, director, Transcend India, advise against gold bonds. “At best, I would recommend five per cent gold in the overall portfolio. Only if people want to replace physical gold with bonds should they choose this option,” he says. So, under what circumstances should you invest in these?
Scenario one: You are a compulsive gold buyer. Many investors buy a small gold coin or trinket every month because they seek safety in gold. For them, gold bonds are a good buy as they are cheaper than coins, which cost more than Rs 3,200 per gramme. Even a small piece of jewellery includes making charges.
Scenario two: You want to make your gold exposure tax free. If your investment in gold exchange-traded funds has completed three years, you may exit and invest in bonds. Union Budget 2015 had made exchange traded funds (ETFs) unattractive by increasing the tenure for availing indexation benefit from one to three years. Exiting in the interim leads to taxation according to the income-tax slab. “As Budget 2016 has made capital gains on these bonds tax-free, investors can move from ETFs to bonds,” says a financial planner.
Scenario three: You are bullish on gold prices. This view doesn’t enjoy strong support. Says Naveen Mathur, associate director, commodities and currencies, Angel Broking: “Gold prices have gone up recently due to problems in China, weakness in dollar index and uncertainty. I expect gold prices to stabilise in the range of Rs 29,000-30,000 per 10g.” He believes there may not be a substantial rally in the near future.
The government has provided some cushion to investors in the form of an annual interest payment. But the benefits aren’t substantial. If prices decline, investors will get a small benefit from the fixed annual interest payment. For example, one bond priced at Rs 2,916 would fetch an annual interest income of around Rs 73. If the price of gold goes up to Rs 5,000 per gramme, interest income would be steady but yield would fall to around 1.4 per cent. Conversely, if gold prices fall to Rs 2,000 per gramme, yield would rise to 3.73 per cent. But, there would be loss of capital if prices slid sharply.
Mathur believes buying bonds in this tranche might not earn much capital appreciation as entering at lower levels would mean better returns. Investors can afford to give this tranche a miss.