Few take exit option for sovereign gold bonds even after 5 years of holding them
24 Sep 2021
The Reserve Bank of India gives Sovereign Gold Bond investors an option to redeem after five years. Gold bonds of four series launched in 2015 and 2016 came up for repurchase in recent months. But RBI data show that in the first two series about 2% of the bonds issued came back for repurchase. In the third and fourth series, only 0.5-0.6% of the investments were redeemed.
“It makes sense for HNIs (high-net-worth individuals) to continue holding these bonds as part of their gold allocation for the entire tenure of eight years, as there will be no tax on capital gains if held till maturity,” said Anup Bhaiya, MD, Money Honey Financial Services.
Based on the issue price, which varied between ₹2,600-3,119 per gram for these four series, investors have made an absolute return of 55-85% on these bonds over five years. In addition, they have also earned interest of 2.5% per annum on these bonds.
Sovereign gold bonds, which were launched in 2015, are considered one of the best ways to hold gold. While there is no fund management fee, investors are paid an extra interest of 2.5% every year and if held for the entire tenure, the capital gains are tax free.
Some investors find SGBs a better option than gold Exchange Traded Funds (ETFs), which charge an expense ratio of 0.5-0.75% every year. However, unlike in ETFs, the SGB has a minimum lock-in of five years. While the bonds are traded on the NSE, the liquidity is low.
Fund managers believe investors should continue to have a 10% allocation to the yellow metal. Gold prices are down by 9% over the last one year. “It is clear now that the Fed is prioritising job creation over inflation. With millions of jobs yet to be filled to get employment to pre-pandemic levels, the Fed’s intended labour market recovery has some time to go. The delay in tightening is laying the ground for higher inflation, which is beneficial for gold,” said Chirag Mehta, fund manager at Quantum Mutual Fund. Investors must have 10-15% gold in their portfolio for diversification, he said.