The last tranche of SGB opens on March 1. Should you subscribe?

As the Sovereign gold Bond Scheme opens for subscription, investor reaction will be influenced by the current gold market scenario.

The last tranche of SGB opens on March 1. Should you subscribe

The final tranche of Sovereign Gold Bonds (SGBs) for financial year 2020-21 opened on 1 March 2021. The 12th tranche of the 2020-21 series opened for subscription at Rs 4662 per gram, with a discount of Rs 50 for online investors. SGB has a tenure of eight years and assures a fixed interest rate of 2.5% which is credited semi-annually to the investor’s account.

With rising bond yields, the price of gold is expected to disappoint in the short-to-medium term. During this period, factors like treasury yield, dollar price, and the speed of economic recovery will dictate the gold price movement. However, the long-term prospects of the yellow metal are not under any doubt.

Gold prices have been falling in the last few weeks, due to which the price of SGB issues is adjusted in each tranche. The scheme ending on 5 March 2021 is 5% lower than the February SGB scheme offer price. The demand for gold hit a 25-year low last year, while demand for gold jewellery was 42% lower compared to 2019 figures. Due to the pandemic, the demand for gold in India fell by 33%. However, due to the comparatively higher price during most of 2020, the fall in sales value was only 14%. 
With the withdrawal of the lockdown and the opening up of the physical gold market, the demand for SGBs has weakened. However, the long-term reliance on gold as a safe haven investment will continue. With paper gold emerging as an effective option of gold investment, allocating 5%-20% of the investment portfolio in gold is now all the more convenient.  

Related: Sovereign Gold Bonds: An attractive tax-free wealth creation investment option

What are SGBs? Who can buy them and from where?
SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. SGBs are a type of government security that is issued in denominations of gold.  Resident individuals, HUFs, trusts, charitable organisations, and universities can buy SGBs from commercial banks, specified post offices/stock exchanges, Stock Holding Corporation of India, or through agents. 

Why should one invest in SGBs?
SGBs are a good investment option if you desire a fixed income and want to avoid the volatility of gold prices. It offers a fixed 2.5% interest rate payable twice a year. You are not taxed on the redemption of SGBs. It is better than an investment in gold jewellery as it yields a regular interest, doesn’t involve making charges and wastage, and is priced close to the prevailing gold price. 

Are there any downsides to investing in SGBs?
SGBs have a long maturity period of 8 years, which can put off investors. An important characteristic of gold is its liquidity. And while SGBs can be traded in the secondary market, the capital gain from them will be taxable. If you stick to the maturity period, you may suffer a capital loss if the gold price goes through an underperforming decade.  

Related: Here's how you can hold gold in demat form just like equity shares or mutual fund units

How does bond yield affect gold prices?
Bond yield, or the interest rate on bonds, has a negative correlation with gold prices. Both bonds and gold are considered to be safe investment options. Gold doesn’t yield any value, or very less as in the case of SGBs. Therefore, when bond yield rises, investors migrate to bonds to get rid of the holding cost of gold. However, when the returns from bonds fall, people prefer gold as its intrinsic value reigns over the low-interest appreciation of bonds. What are the rates and charges of gold loans offered by banks?


Related Article

Premium Articles