Finally, the time has ripened for the gold investors in India with their increase in interest in paper gold, particularly in sovereign gold bonds or SGBs. Last month on May 21, the subscription ended for Series I of the SGBs. It received the second-highest subscription by value and volume since it was launched in the year 2015. The subscription by volume was around 5.32 tonnes and by value, it amounted to Rs 2,541 crore. In simpler words, the value of subscription solely in Series 1 is much higher than Rs 2,316.5 (approx.) subscribed in SGBs for the entire Financial Year (FY) 2020. The subscription skyrocketed at Rs 16,048.73 (approx.) in terms of value in FY21.
What are Sovereign Gold Bonds?
These are government securities denominated in grams of gold. They are the substitutes for possessing physical gold. Investors are required to pay the issue price in cash and the bonds will be redeemed in cash on attaining maturity. The Bond is issued by the Reserve Bank on behalf of the Government of India. The Sovereign Gold Bonds were launched to stop imports of precious metal. In terms of value, the SGBs had received a subscription of Rs 3,387 crore for Series V in FY21 and by volume, the amount was 6.35 tonnes.
Firms like Zerodha and HDFC Securities (agents for brokering in Sovereign Gold Bonds) recorded huge growth in SGBs on their respective platforms. Zerodha which was launched in the year 2016, hardly any activity was noticed in the first few issues of the SGBs. The volumes started overflowing in April 2020, rising from merely 10 kilograms to 100-200 kilograms over the last few issues. The CEO of Zerodha, Nitin Kamath informed that the volumes of issuing SGB Series 1 witnessed the highest ever at 250 kilograms.
HDFC Securities, in July 2016 had launched SGBs. Ashish Rathi, the Whole Time Director of HDFC Securities, said that they launched the SGBs the very day when it was made available on the exchange platform. Rathi also said that they have witnessed a growth that is 9 times more than the growth between 2016-17 and 2020-21 with respect to value and 5 times with respect to volume. The uncertainties which have come along with the pandemic have made retail investors (an individual or non-professional investor) invest in safe haven assets such as the yellow metal. A considerable number of investors have shifted to the paper form of investment because of the lockdown restrictions and storage risk.
Three series have been launched in close succession
Typically, the Government launches 10-12 series of Sovereign Gold Bonds in a particular financial year. The subscription for two series for FY22 has reached the maximum limit, the third series has concluded on the 4th of June. SGB Series IV is all set to be unveiled on July 12. The Government is yet to release the subscription data for series II.
Why SGBs has become the investor’s best friend?
Among various reasons, two of the most important reason for investors to blindly trust SGBs over any other paper form of gold are; the investment amount of 2.5 percent per annum interest paid semi-annually, and the tax-free maturity amount after 8 years.
What is the difference between SGBs and Digital gold?
In digital gold, one has to pay 3 percent GST and around 4 percent in spreads and commission. In the case of SGBs, one gets paid for owning them, given that one gets an interest of 2.5 percent. For example, in Series I in FY22, the investors have saved over Rs 6 crore in GST and commissions compared to those who invested in digital gold. If a person subscribes to SGBs online, one gets a discount of 50 bucks on the issue price. Taking, for example, the issue price for the current Series (Series III) has been set at Rs 4,899 per unit. If an investor subscribes to it online and makes the payment through a digital medium, the issue price will become Rs 4,839. Every unit means I gram of the precious metal.
Lump-sum investment or fragmented investment?
One should go for lump-sum investment only when the gold prices are on their way down and much below the all-time high price levels because it is difficult to predict the price trajectory. Investing a small amount in each transaction lowers down the risk factor. The fragmented investment provides the opportunity to track the difference in price and a window to add more funds periodically to the SGBs. For the one-time investors, they can aim for investing in lump-sum in any of the series. In the month of August 2020, gold has reached its all time high price of Rs 56,191.
Experts advise that one should at least keep 5-10 percent of the portfolio in gold because gold performs as a hedge against strong inflation.