Want to hedge against risky bets? Invest in the current SGB tranche

But keep a 5-year horizon; choose gold ETFs if you wish to exit sooner

Series I of the Sovereign Gold Bond Scheme (SGB) 2023–24 is open for subscription from June 19 until June 23, 2023. This tranche is being sold for Rs 5,926 per gram, with a discount of Rs 50 available to online subscribers.

Positive outlook
 

Gold, which has historically served as a hedge against inflation and other economic concerns, has delivered a compound annual growth rate (CAGR) of 9.5 per cent over the past 15 years, 7 per cent over 10 years, and 13 per cent over five years.

Vijay Kuppa, chief executive officer (CEO), InCred Money, says, “Gold also acts as a hedge for your equity portfolio as investors tend to move towards this safe-haven asset during recessionary scenarios and geopolitical tensions.” In other words, gold tends to outperform during periods of risk aversion.

Gold’s price has also received support from buying by central banks in the past year on account of growing concerns about the economic risks in the United States, whose currency, the dollar, serves as the world’s reserve currency. Kuppa says, “This buying spree could continue so long as recession and geopolitical risks are present.” 

No issuer or purity risk
 

Since SGBs are issued by the Reserve Bank of India (RBI) on behalf of the government of India, there is no issuer risk. Investors also don’t have to deal with purity-related concerns.

Col. Sanjeev Govila (Retd), a Securities and Exchange Board of India or Sebi-registered investment advisor and chief executive officer (CEO), Hum Fauji Initiatives, a financial planning firm, says, “SGBs are held in dematerialised form, so customers don’t have to bear storage or security concerns either.”

These bonds offer investors a return kicker. Govila adds, “They offer 2.5 per cent interest per year payable semi-annually. In addition, the price the investor gets on maturity is at par with gold’s prevailing market price.”

Investors also enjoy tax benefits on these bonds. “Investors who hold them till maturity are exempted from taxation of capital gains,” says Govila.

Low on liquidity

SGBs, however, come with a minimum lock-in period of five years. Dilshad Billimoria, board member, Association of Registered Investment Advisors, says, “After five years one can exit on the date of coupon payment.”
 

These bonds are also listed on the exchanges. Investors can exit them anytime by selling their holdings on the exchanges. But they may have to sell them at a discount if liquidity is poor.

Investors must complete the full tenure of eight years if they want the capital gains tax benefit.

Returns from SGBs are not guaranteed but depend on the prevailing market price.

Who should invest?

SGBs are suited for long-term investors willing to hold on to them for at least five years. Exchange traded funds (ETFs) are better suited for investors with shorter horizons. Pankaj Shrestha, head investment services, Prabhudas Lilladher says, “Investors with a short investment horizon and a preference for investing in tranches can consider gold ETFs due to their flexibility and liquidity. Gold ETFs don’t have a lock-in, allowing investors to buy and sell units in real time during market hours.”

Shrestha adds that SGBs have become more attractive after the withdrawal of long-term capital gains (LTCG) benefit from gold ETFs and gold mutual funds, starting from April 1, 2023. 

Kuppa says, “Indexation benefit is provided on long-term capital gains (when units are sold after three years) arising from the transfer of bonds. These benefits are not there in the case of other forms of gold investment.”

Things to keep in mind

The price you get if you exit via the stock exchange is the market price for 999-purity gold, adjusted for demand-supply. Govila says, “This price will be influenced by the trading pattern at that time.”

While gold must be a part of your portfolio, you should avoid over-exposure to it. Billimoria says, “While SGBs are among the best ways to allocate to gold, investors should ensure that their allocation to the yellow metal doesn’t exceed 5-10 per cent of their total portfolio.”