BOMBAI :Sovereign gold bond (SGB) are poised to achieve significant returns, closely rivaling those of stock markets, when the first tranche of bonds issued eight years ago matures on November 30 this year.
Against an issue price of ₹2,684 per gram on November 30, 2015, the closing price of 24 carat gold was ₹5,929 by GM on Friday, which translates to a compound annual growth rate (CAGR) of 12%, including the interest component on the face value of the bond, adjusted for tax at the highest income level by 30%. The gold rates used are determined by the India Bullion and Jewelers Association.
Against this, the Clever The total return index, which includes dividends, generated a CAGR of 13.82%, rising from 10,146 to 28,582 between early November 2015 and last Friday.
“The best part of this instrument is that, apart from income “Apart from the price difference, there is an interest rate component on the issue price, which makes it a unique investment proposition,” said Amol Joshi, founder, PlanRupee Investment Services.
Joshi said gold has the dual benefits of being a hedge against inflation and a safe haven asset which, along with international stocks, should form the “satellite part of the core equity and debt portfolio”. a portfolio should include international stocks and gold investments through SGB, which is a much better investment than that in physical gold.
Gold bonds have been very successful, with SGBs backed by a total of 109 tonnes of gold subscribed over the past eight years. At the current price of ₹5,929 per g, the value of the outstanding bonds is ₹64,650.5 crores against the net assets held by Gold ETF of ₹22,339 crores at the end of June.
The first tranche of bonds saw the redemption of 54 kilograms (kg) against an issue of 914 kg. “Bonds will continue to attract investor interest, thanks to the strong returns seen over the last eight years,” said Shekhar Bhandari, president of global transaction banking at Kotak Mahindra Bank.
10% long-term capital gains tax on stocks takes effect above ₹1 million. In the case of gold bonds, there is no capital gain if held to maturity, but the interest is taxed at the investor’s applicable tax bracket.
The minimum investment in the bond is one gram with a maximum limit of 4 kg for individuals per financial year. Eligible investors include individuals, HUFs, trusts, universities and charitable institutions. Each family member can purchase the bonds in their own name if they fall into the category of eligible investors.
Although the benefits include tax-free capital gains and a fixed interest payment payable semi-annually on the issue price, some of the risks include capital loss in the event of a fall in the market price of gold and the long holding period, although an early exit option is offered. after the fifth year from the date of issue to the coupon payment dates.
Of the 110.4 tonnes subscribed over the last eight years, only 1.3 tonnes were reimbursed prematurely.
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