Last Updated on August 22, 2022
Here is why one should not buy the sovereign gold bonds which are on sale from Since Nov. 5th 2015, despite the sovereign guarantee and the 2.75% interest rate. From today (5th Nov. 2015), Sovereign gold bonds will be available for subscription at an issue price of Rs. 2,684 per gram. Subscribers can buy bonds which are worth minimum 2 gms to maximum 500 gms.
The sovereign gold bonds are for an investment duration of 8 years with an exit option after 5 years. An interest rate of 2.75% will be offered on the purchase price, over and above the appreciation or depreciation in gold price.
Reasons why one should not buy the sovereign gold bonds
- The most tax efficient way to accumulate gold for a marriage is to buy it: jewels if planning for a marriage and gold bars or coins if you plan to hold it as a hedge in case of war, hyperinflation, etc.
- Sovereign gold bonds are ways to invest in gold. Not accumulate it.
- Gold is an extremely volatile commodity and it is ill-advised to buy these bonds which come with a lock-in which is higher than that for ELSS mutual funds (3 years).
- Those who wish to benefit from gold price movements or those who to add gold for diversification in their investment portfolios are better off with a gold ETF or gold funds.
- ETFs would have 1% to 1.5% expense ratios and the returns would be lower by that much. However, they offer unmatched liquidity. One can buy on dips and book profits. This freedom is vital when dealing with volatile instruments and is well worth the expense ratio.
- The 2.75% interest rate is on the amount invested and not on the maturity value. This interest on the gold bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961) as income from other sources. Sovereign Gold Bond 2015-16. That is it would be taxed as per income slab.
- Such a low post-tax interest rate is not worth it considering the associated lock-in. Imagine the price movement in gold, if these bonds were issued five years ago.
- Yes, Sovereign gold bonds will beat ETF returns by about 2.4% for those in 30% slab and about 2.6% for those in 20% slab. Is that enough reward for being locked in for 5 years with a volatile asset class? A vehement no, in my opinion.
- Gold is not a fixed income asset class. Investing in gold is riskier than investing in stocks! So I expect a risk premium. This risk premium should be free from constraints. The lock-in period with a small interest rate that would be taxed as per slab are not good enough for me.
Budget 2016 Update (does not change conclusions)
It is proposed to provide that redemption by an individual of Sovereign Gold Bond issued by Reserve Bank of India under Sovereign Gold Bond Scheme, 2015 shall not be charged to capital gains tax. It is also proposed to provide that long terms capital gains arising to any person on transfer
Conclusions:
Buy physical gold (not ETFs) if you wish to accumulate gold for a marriage or as a hedge.
Use ETFs invest in gold to diversify your portfolio.
Do not buy the sovereign gold bonds which are currently on sale.
🔥Enjoy massive year-end discounts on our courses and robo-advisory tool! 🔥
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
- Follow us on Google News.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Join our YouTube Community and explore more than 1000 videos!
- Have a question? Subscribe to our newsletter with this form.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)