Sovereign Gold Bond Scheme 2020-21: When to use and when not to!

Here is when investors should use the Sovereign Gold Bond Scheme 2020-21 and more importantly when not to!

Published on / By M. Pattabiraman Twitter: @pattufreefincal / 1 Comment

Published: April 14, 2020 at 4:44 pm

Last Updated on August 22, 2022

The finance ministry has announced the release dates of Sovereign Gold Bonds for 2020-2021. Six issues (tranches) are to be released once each month from April to Aug 2020. Here is when to use these bonds and when not to!

There are at least three distinct ways in which investors approach gold. The majority of them (at least in India) accumulate it in physical form, typical jewels. Although some see it as an investment, it is a recyclable consumable. This accumulation can also be done electronically via ETFs, Gold Funds or Sovereign Gold Bonds.

The second approach is to track the price of gold for “some returns merely”. The third approach is to exploit the volatility of gold, add it to a portfolio of stocks and bonds, meticulously rebalance and track the volatility at the portfolio level. That is as a means of diversification and possible risk reduction.

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    Sovereign Gold Bond Scheme 2020-21 Schedule

    The Bonds can be purchased via scheduled commercial banks, Stock Holding Corporation of India Limited, designated post offices, NSE, BSE. This is the issue-schedule for 2020-2021.

    TrancheDate of Subscription
    2020-21 Series IApril 20-24, 2020
    2020-21 Series IIMay 11-15, 2020
    2020-21 Series IIIJune 08-12, 2020
    2020-21 Series IVJuly 06-10, 2020
    2020-21 Series VAugust 03-07, 2020
    2020-21 Series VIAug.31-Sept.04, 2020

    When not to use Sovereign Gold Bonds!

    Do not use Sovereign Gold Bonds for getting some returns from gold or for some gold exposure in your portfolio or diversification! They are not liquid enough, you cannot sell them mid-way (unless you are ready to sell lower than the market rate of gold) and if you wait for them to mature, the returns can just about be anything!  Shown below is the 8-year rolling returns of gold USD and gold INR price per troy ounce from Jan 1979 to March 2020.

    8 year rolling returns of gold USD and gold INR price per troy ounce from Jan 1979
    -year rolling returns of gold USD and gold INR price per troy ounce from Jan 1979

    Since you cannot sell them freely, you cannot tactically book profits or rebalance systematically with these bonds. If you wish to do this, choose a liquid ETF with low price-NAV variations. A gold fund that invests in a gold ETF would be a better choice.

    When to use Sovereign Gold Bonds!

    Use these only if your ultimate aim is to accumulate gold for a future need, say for a marriage. Sovereign gold bonds offer a tax-free, risk-free way to accumulate gold as long as your future gold purchase is more than eight years away. You also get 2.5% interest (taxable as per slab) on the initial gold value as a “thank you for reducing gold imports(temporarily)” gift from the govt.

    You can buy these bonds in the secondary market via a demat account from desperate investors looking for cash and willing to take a loss. This approach is risk-free because the bond tracks the price of 24-carat gold and at any given time and after eight years one could buy 22-carat jewellery

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