Wednesday, April 26, 2017

SOVEREIGN GOLD BONDS - GOOD ONE BUT.....


A foodie needs an excuse to eat. 
A Gold lover does not even need an excuse to splurge on Gold and occasions like Akshaya Tritaya is the BIGGEST festival for any Gold lover!!

The 1st tranche of Sovereign Gold Bonds (SGB) for fiscal 2017-18 (and 8th in the series starting 2015-16) has opened for subscription on 24 April and will close on 28 April, a day ahead of Akshaya Trithiya
Clearly the aim is to play on People’s emotional attachment for Gold and attract as much into these Bonds as possible.

 

Its priced at 2901 at a discount of Rs.50 against nominal price of Rs.2951 (based on Avg Closing Price published by India Bullion & Jewellers Association for 999 purity. 

DETAILS : 
Tenor : 8 years
Exit option: 5th Year onwards
Bond will be issued onMay 12th
Minimum : 1gm
Maximum : 500gm
Documents Reqd : Aadhaar/PAN, TAN/Passport, Voterid
Investment in name of Minor is allowed (Guardian Documents reqd)



HOW TO BUY :

1. Through your Stock Broker.....Units will be credited to demant
2. Through Post Office....will be issued Physical Bond (when selling, not you WILL have to convert them to demat form)
3. Through Banks (both physical and demat mode available)



So, should you buy this SGB or skip??

Lets check it out : 
Pros : 
1.
The Biggest attraction for Gold is its Liquidity which can be sold off anytime (virtually antime). But this is for Physical Gold but what about SGB?
SBG too offers good Liquidity. 
 Liqiudity available anytime as bonds are to be listed on NSE & BSe 
2. Gold gives returns only in form of its price Appreciation but the Sovereign Gold Bond Scheme offers additional 2.5% interest!!
This interest is paid on Face Value and paid semi-annually. 
3. The Bonds carry Sovereign Guarantee!!!
4. The Bonds can be used as a Collateral for Loans
5. You can GIFT these Bonds to your Minor Children/Relatives and even Friends. 




CONS : 
1. While Liquidity is available through the listing of the Bonds on Stock Exchanges, this benefit is negated as any profit will result in Capital Gains of 20% (thankfully, with Indexation benefit). 
2. Interest is to be calculated on FACE VALUE of Bond and not on Market price 
3. Interest Rate has been reduced from 2.75% in earlier tranche to 2.5% now
4. And, sadly, the interest payments will be taxable at individual tax slabs
5. Though an option is available to get thse Bonds in Physical Form, it should be noted that in case you want to sell, you will have to compulsorily convert the same into Demat form and then sell the same. 
6. The demand for Gold is expected to COME DOWN going forward. 
Improving tech to extract gold has lead to cut in production costs and Gold is expected to come down, hence timing is cruicual. 
7. Since there is no SIP option, you do not have the option of adding more Gold Bonds in case of fall in prices
Previous tranches (already listed on Stock Exchanges) reveal that they have not exactly set the pulses soaring as except 2, 5 tranches are showing NEGATIVE returns which indicate that Gold should be seen purely as a Diversification tool and not as an investment tool. 



As an ideal Asset Allocation strategy, you are encourages to have Gold Exposure of 5-10 per cent of overall portfolio, to diversify risk. Your Advisor would be in a better position to indicate how much exposure you should have. 


GOLD OUTLOOK : 
Short term Gold looks good but long term....it does not look very attractive...Hence stick to Asset Allocation. 


FINALLY, 




Invest ONLY if you are sure to hold till Maturity. 
Invest ONLY if your Asset Allocation indicates you need to have more Gold exposure. 


Even if we assume just a 5% increase in Gold prices in 8 years.....the returns will be much higher due to the additional interest of 2.5% bign given by Govt. 
For example, if you invest Rs.50,000 in this bond and the same will appreciate to say...73872...you will actually get an extra Rs.10,000 which is 2.5 pa interest that the Govt is giving you. 
So you will end up with Rs.83872/- which is a return of 6.68% CAGR

Cost wise, SGB is really very effective even compared to Gold ETFs but cost is not everything. 
You need to look at Liquidity too. 
Even if you are lover of Gold and accept the benefits that SGB does offer....do not forge tthe dictum “DONT PUT ALL YOUR EGGS IN 1 BASKET”
While this refers to Different asset class...it could be referred to Gold too. 
Do not put everything into SGB....do have bit of exposure to Gold ETFs too
Also visit http:/http://goodinsuranceadvisor.blogspot.in/


No comments:

Post a Comment

Translate