Do not buy Sovereign gold bonds If you don’t know when to exit!

/ M. Pattabiraman / @pattufreefincal / 3 Comments

Published: November 5, 2015 at 8:16 pm

Last Updated on September 6, 2019

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

  1. 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.
  2. Sovereign gold bonds are ways to invest in gold. Not accumulate it.
  3. 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).
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.

Do share if you found this useful
We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
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!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). 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 how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and 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 of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 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
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis 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

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, 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)
Free android apps