The government has discontinued Sovereign Gold Bonds (SGBs), raising concerns among investors who saw them as a lucrative gold investment option. With no fresh issuances, there is an opportunity to buy SGBs through the secondary market. But is it a smart move? What are the fine print to consider before buying? Experts weigh in on the factors that should guide your decision.
Col Sanjeev Govila (Retd), Certified Financial Planner and CEO of Hum Fauji Initiatives, highlights that SGBs from the secondary market are currently trading at a minor discount to the gold price, making them attractive investments than direct gold, especially considering that they give a small interest also. It is advisable to look for issues trading significantly below their nominal value on the NSE or BSE for better returns.
Investors should avoid buying at excessively high premiums and check trading volumes to ensure liquidity. If volumes are low, they may need to hold until maturity. What are the other options?
“Alternatively, Gold ETFs or Gold Mutual Funds are better options, offering liquidity and tax efficiency, with no GST, unlike physical or digital gold. Additionally, investors can opt for a SIP in Gold Mutual Fund schemes, making gold investment more convenient and accessible for retail investors,” says Rajani Tandale, Senior Vice President of Mutual Fund at 1 Finance.
Buying SGB from the secondary market will be a good option for those who have specific financial goals. It will allow them to align their investment with specific goals. “Before buying from the secondary market one must consider the remaining tenure of the bond as it should be suitable as per the client's needs. Evaluate how the SGB price compares with the current gold market rate and given the market’s low liquidity, ensure that you can buy or sell at a reasonable price. Moreover, consider post-tax payout and explore other gold investment options like Gold ETF or Gold Fund,” said Sushil Jain, CEO of PersonalCFO.in
Govila listed critical factors to evaluate before investing in SGBs through the secondary market:
• When buying from the secondary market, check the maturity date carefully. Issues closer to maturity (8 years from the issue date) might offer better yields but provide fewer interest payments. Each issue's details are available on the RBI website with the specific maturity dates.
• Remember that SGBs offer 2.5% annual interest, paid semi-annually, which you'll continue to receive even when buying from the secondary market. However, interest is calculated on the nominal value (issue price), not your purchase price, maybe making the overall yield very small. Eg, current 2031 SGBs are giving an interest yield of about 1.4% considering the high SGB price at which they are available in the market.
• Liquidity in the secondary market can be low, with wide bid-ask spreads. Place limit orders rather than market orders to avoid paying a premium, and be prepared to wait for execution at your desired price.
• Consider tax implications - capital gains after 8 years remain tax-free, but if you sell before maturity on the exchange, they will entail capital gains tax depending on their period of holding. If they are held for more than 12 months, the capital gains shall be taxable as long-term at 12.5 per cent without any indexation benefits. Otherwise, they shall be taxed as short-term capital gains at applicable slab rate gains. Interest income is anyway taxable at your slab rate.
• Unlike popular belief, buying deeply discounted older SGBs might not always be beneficial as they've missed out on gold's recent rally and may indicate underlying problems with that particular issue's liquidity.
• Consider that future government gold schemes might offer better terms, making current secondary market investments less attractive. The discontinuation might be temporary.