Sovereign Gold Bonds: Should You Subscribe?

The Sovereign Gold Bond 2022-23 (Series II) opens for subscription from Aug. 22-26, 2022.

<div class="paragraphs"><p>Pile of gold bullion coins and bars. (Image from Unsplash)</p></div>
Pile of gold bullion coins and bars. (Image from Unsplash)

The Sovereign Gold Bond 2022-23 (Series II), that opens for subscription from Aug. 22-26, 2022, comes at a crucial time for investors.

Uncertainty about high inflation, weakening rupee and global geopolitical concerns require a clear focus on the role of gold in the portfolio. The bonds will be available at a price of Rs 5,197 per gram and the duration of the investment is eight years with an exit option available after the fifth year on the dates of the interest payment of the bond.

Is There Any Extra Earnings Opportunity?

An investor who is looking to take an exposure to gold gets an additional return when they choose the sovereign gold bond as compared to the other investment options in gold.

On one hand, the bond gives the benefit of appreciation in the price of gold but at the same time there is an extra return available. This is in the form of 2.5% interest that is paid out on the bonds each year. This interest is over and above the price appreciation so it makes the bonds attractive in terms of taking an exposure to gold.

Another form of extra earning for the investor is if they invest online and through a digital mode then they get another Rs 50 off per gm, so their cost price in the issue becomes Rs 5,147 per gm.

Is Buying In A New Issue Better Than Buying From Market?

A question that an investor will have is whether they should consider the new issue or should they buy the bond from the secondary market of some previous issue.

The bonds are traded on the secondary market on the stock exchanges and a look at the price here of several previous offerings shows that this is around the same level as the current issue. There is some liquidity that is present on the secondary market whereby at least investors wanting to take a small exposure will be able to complete their transaction. Overall, there is not much price difference in terms of where the bond is bought from but matching of the time horizon needed for the investment would be crucial for an individual investor.

Should I Take An Exposure To Gold?

Gold is an important part of the asset allocation mix of an individual’s portfolio. There has to be some exposure to it plus there is an added benefit of returns in India.

There are two factors that impact the returns from gold in India. One is the international price change and the other is the exchange rate movement. A look at the returns from gold prices over the last 10 years based on changes in spot prices shows that the local prices have always given better returns than just the international price movements. This can be directly linked to the weakening of the rupee.

The returns earned from gold are significant in many ways. A detailed look at the compounded returns over a longer time frame show that in a five-year period the returns in India are in double digits. Especially notable is the situation over a decade. While international gold prices are virtually flat over this period, the prices in India are far higher at over 4%.

It is evident that gold in the portfolio mix is giving a reasonable amount of appreciation and hence there is a need to maintain this exposure as it also gives the benefit of diversification.

Should I Buy In This Issue?

An investor looking to take exposure to gold for the long term should be looking at this offering because there are several factors at play. One is that the price at the current moment holds out scope of appreciation over the years. Adding the expected rupee depreciation would only make it more favourable for investors.

In addition there is the extra 2.5% interest that is available and also for long term holders if they hold the bonds till maturity then even the capital gains will be tax free in their hands. All this can bring in significant net returns at the end of the day.

(Arnav Pandya is founder of Moneyeduschool.)