The Centre has launched Sovereign Gold Bonds (SGBs) for financial year 2023-24. The SGB Scheme 2023-24–Series I will be open for subscription from June 19 to 23 and is priced at Rs 5,926 and Rs 5,876 per gram of gold. You will get Rs 50 discount if you apply online and pay against the application digitally. The issuance date for Series I FY24 is June 27. The Reserve Bank of India (RBI) issues SGBs on behalf of the Centre as an alternative to buying physical gold.
Take a look at some of the pros and cons of SGBs: Like any investment, there are pros and cons to investing in SGBs.
Pros:
Gold is considered a safe-haven asset, and the RBI issues it on behalf of the central government.
You don’t have to be concerned about storage or security. SGBs are held in dematerialised form, which means there are no storage or security concerns.
An investor will get 2.5% interest per annum, payable semi-annually and maturity is linked with the market price of gold.
SGBs offer tax benefits, including exemption from capital gains tax if held until maturity.
Cons:
The returns on SGBs are not guaranteed and depend on the prevailing market price of gold at the time of sale.
There is a lock-in period of 5 years, so you cannot exit your investment before then. It is eight years if you want the capital gains tax benefit.
When can you exit?
You can exit after a minimum of 5 years. However, it is tradable on stock exchanges if held in demat form. Col. Sanjeev Govila (Retd), a Sebi Registered Investment Advisor (RIA), and CEO of Hum Fauji Initiatives, a financial planning firm, said, “SGBs are suited for long-term investors looking for a safe haven asset and willing to hold on to their investment for at least five years. Conversely, ETFs are more suited for short-term traders who want to take advantage of short-term price movements in the gold market. The price you get when you exit your SGBs via the stock exchange will depend on the prevailing market price of gold and may be influenced by the trading pattern at that time.”
Should you invest?
The ICICI Direct research report states that gold prices recently witnessed a correction of around 5% from their all-time high levels in May 2023. From around 62000 levels, gold prices are currently trading at below 59000 per 10 grams on the MCX exchange. “As the outlook on gold prices remains positive, this minor correction is a good entry opportunity from a long-term allocation perspective.”
“It completely depends on individual investment goals and risk appetite. SGBs are a good option for investors who want to invest in safe assets, wants to hedge and diversify their portfolio,” said Govila.
He further said, “Historically, gold has been an excellent hedge against inflation and other economic concerns. Gold prices have fluctuated in recent years but generally trended upwards. The outlook for gold in the future is uncertain, but many experts believe that gold will continue to be a valuable asset.”
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However, one must also understand that investing in gold should always be considered from an asset allocation perspective. A long period of sub-optimal returns and returns in a non-linear pattern are inherent features of gold price movement.
“Currently, it is time to be an equal weight on the overall asset allocation while the historical return is higher. The outlook stays positive, given we are at the end of the interest rate hike cycle, particularly in the US. While inflation concerns globally have moderated, they still remain far above desired levels (US average inflation for CY23 is expected at 3% while the US Fed target is 2%). Generally, we recommend 5-15% as the normal range of allocation to gold. Hence, investors may maintain around 5-10% allocation to gold,” said the report.
Echoing similar views, Govila said, “We recommend investing at least 5% – 10% of your portfolio in gold. However, if you’re considering investing in SGBs, you should be comfortable investing for the long term to use the best benefits of SGBs.”
