Economy

As Nifty And Markets Enter Uncertain Terrain, Gold’s Looking Good; Sovereign Gold Bonds Are Worth A Try

Gold bars India (SAM PANTHAKY/AFP/Getty Images)
Snapshot
  • Not just that, here are four reasons as to why Sovereign Gold Bonds are a better investment than even physical gold.

As US economic growth slows and the interest rate scenario eases, gold has been a steady performer over the last year. In India, gold has outperformed the stock markets over the last one year to date, with the Nifty rising by 2.9 per cent and gold by 6.6 per cent in 2019, and another 5 per cent in 2019 so far (in rupee terms, according to goldprice.org).

Point-to-point comparisons may be misleading, as returns depend on when you may have bought a share or index future and when you are calculating the returns. But it is worth noting that even if one takes the lowest point of the Nifty over the last one year and its highest (that is, assuming you are a great market timer), and you do the same for sovereign gold bonds (SGBs), gold has still outperformed. We find that the Nifty gained 18 per cent from its lows of 9951 to a high of 11,760 over the past 52 weeks (the 11 February quote being much lower in the 10,800-10,900 range). The Sovereign Gold Bond 2.75 per cent (November 2023 maturity) rose 21 per cent.

The point of comparing the Nifty’s performance with sovereign gold bonds is simple: the tax scheme is favourable when it comes to calculating long-term capital gains (LTCG) on gold. There is no LTCG on sovereign gold bonds if you sell them on maturity; LTCG on shares, on the other hand, attract 10 per cent tax without indexation.

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Moreover, sovereign gold bonds currently pay interest at 2.5 per cent annually (which, though, is taxable), a figure comparable to dividend yields on most blue chip stocks.

The downside in gold bonds is that they are largely illiquid, and the tenure is eight years, with an exit possible only after the fifth year.

However, if you anyway plan to hold gold as part of your long-term portfolio, sovereign gold bonds may well be better than physical gold. Here’s why.

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First, physical gold often is sold by jewellers at a premium to market prices. SGBs are sold by the government at periodic intervals at close to market prices. They will also be redeemed at close to market prices. Plus, they are safer. There is no need to keep them in safe deposit vaults and fret about safety.

Second, gold has returned positive gains in all but two years since 2004 (the only two years of negative returns in rupee terms were 2013 and 2015). Over the last 15 years, gold has given an average annual return in excess of 11 per cent. SGBs, if they return a similar rate, may thus deliver as well as mutual funds.

Third, SGBs, as mentioned above, are free of LTCG taxes on maturity unlike shares or mutual funds. While equity funds and shares face 10 per cent LTCG, and debt funds face 20 per cent tax on the indexed cost of acquisition, the post-tax return for SGBs gets a bump-up.

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Fourth, one downside of buying SGBs is that in the year of exit you could lose (or benefit less) if ruling gold prices are lower than the average returns expected. But one could average the costs down by buying SGBs every year, whenever the government offers them for purchase. This way SGBs can take some of the risk out of market movements, just as SIPs do in the case of mutual funds.

Last, if the idea is to be able to buy gold jewellery at some later date, SGBs are ideal. Whatever the exit price, you can buy the amount of gold you always wanted to by selling the SGBs at that point.

For gold buffs, SGBs make more sense than physical gold; even for those merely looking to balance a portfolio full of stocks and fixed-interest securities, SGBs offer a useful form of diversification. (Read here and here).

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But don’t take my word for it. Ask your investment advisor.

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