Gold Bonds: Is The Time Right To Attract Retail Investors?
Amid concerns of stagflation globally and elevated inflation locally, the government is issuing new tranches of the sovereign gold bond.
These securities, considered to be akin to holding gold, may have some appeal at a time depositors are dealing with negative inflation-adjusted returns. Yet, the uncertainty over the trajectory of gold prices could weigh on investors.
The first tranche of the Sovereign Gold Bond Scheme for 2022-23 is open for subscription between June 20–24, 2022, at an issue price of Rs 5,091 per one gram of gold and a discounted price of Rs 5,041 per gram for investors applying online.
How Gold Bonds Work
Sovereign gold bonds are government securities denominated in grams of gold. They are substitutes for holding physical gold.
Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.
The price of gold is fixed on the basis of the simple average of the closing price of gold of 999 purity for the last three business days, as published by the India Bullion and Jewellers Association Limited and specified by the RBI.
Holders of these bonds earn some interest based on a pre-determined rate, but the real appeal of these securities is due to the possibility of capital appreciation on the underlying gold holding.
In a hypothetical scenario, if gold rises by 10% by maturity, the retail investor gains as much from the price appreciation. However, if gold falls by 10%, the retail investor still receives an an annual interest of 2.5% per annum.
This is down from 2.75% interest paid earlier, but at least provides partial compensated for the inflation risk annually, said a note by Motilal Oswal.
Should You Apply? Maybe; Maybe Not
An inflationary environment, geopolitical uncertainty and negative real rates of interest have all made sovereign gold bonds more attractive, said Anup Bhaiya, founder at MoneyHoney Financial Services.
Considering the adverse geopolitical scenario this year, gold should have performed better, Bhaiya said. It is fundamentally better placed to do well over the medium term, he added.
Pankaj Mathpal, managing director at Optima Money Managers, said that the current issue price is attractive. In the next one year, he expects gold prices to rise by 8-10%.
Of all the avenues to invest in gold, the sovereign gold bond scheme is the best, according to Bhaiya. Mathpal too said that gold bonds continue to remain the best available option to invest in gold when compared to exchange traded funds and mutual funds.
Prableen Bajpai, founder at FinFix Research, however, cautioned against investing in gold as a hedge against inflation.
Since the start of the year, gold prices have risen about 6% from Rs 48,157 per 10 grams to Rs 50,989 per gram as on Friday. "Do we know what gold price will be after eight years?" she asked.
Performance So Far
Another way to assess gold bonds as an investment is to look at the returns given by these securities compared to other options.
According to an analysis by Bhaiya, post-tax returns on sovereign gold bonds have given higher returns than bank fixed-deposits in most time periods. "It belies the belief that gold does not give returns."
Eight-year rolling returns on a daily basis for sovereign gold bonds is 12.29% on an average per annum pre-tax, while post tax, the figure stands at 11.54%, according to the analysis.
Despite the reasonable performance, relatively small amounts have been invested in gold bonds.
So far, Rs 38,693 crore has been raised through the scheme up to 2021-22, since its inception in November 2015, according to the RBI's annual report. In 2021-22, an aggregate amount of Rs 12,991 crore was raised by issue of ten tranches.
The scheme has seen limited success, said DK Joshi, chief economist at Crisil. It has not been able to sway the appetite for physical gold.
Devendra Pant, chief economist at India Ratings And Research said that gold imports continue to adversely affect the current account balance. While the sovereign gold bonds offer retail investors benefits such as waiver of capital gains tax if the bonds are held for the entire eight-year period, they haven't seen great traction. "While the government has made an attempt to attract investors through such benefits, it can only offer the option, leaving the choice to retail investors," said Pant.
