Sovereign gold bonds: What you need to know before buying

Published: June 11, 2016 at 6:46 am

Last Updated on

Here is what you should know before buying sovereign gold bonds either in the primary market (when the next tranche is released) or secondary market (1st tranche issued in Nov 2015).

In my opinion, there is only one thing that someone buying paper gold should know: just how volatile returns can be!!

The fin min says

They will carry sovereign guarantee both on the capital invested and the interest.

This does not mean returns are guaranteed!!

First some features of sovereign gold bonds

  1. There is no physical gold associated with these bonds!
  2. The bonds have a maturity of 8 years, but can be redeemed after holding for 5 years. They can be traded freely at any time.
  3. Tax treatment: Indexation benefits are allowed if the bond is traded (at any time). Gains upon redemption  is tax-free. Thanks to Balaji for pointing this out.
  4. The 2.75% per year interest on the purchase price is insignificant even if tax-free – it is not! Tax as per slab will be applicable.
  5. Gold ETFs vs Sovereign gold bonds: Considering how volatile gold is, I think ETFs still hold the edge in terms of convenience for  investors who would like to manage the risk associated.
  6. Volatility matters mainly for retail investors who would like to buy and hold. Before you think paper gold (these bonds or etfs) is an option to “save for my daughter’s marriage” I would recommend that you have a nice hard look at the following charts.

The following are rolling returns chart of daily INR gold price obtained from the world gold council

Rolling returns imply the return duration is rolled over by one business day. For example, suppose I gave data from 1st Jan 1978 to June 1st 2016

If I wished to calculate 1Y returns with this data set, the first possible 1Y is between Jan 1st 1978 to Dec. 31st 1978 (call this return R1)

The next possible 1Y is between  Jan 2nd 1978 and 1st Jan 1979 (call this return R2) and so on.

All the returns (R1, R2, R3) are plotted against the start dates of the 1Y period. Now over to the data.

Rolling Returns – 1 year

Gold-rolling-returns-1Y

Rolling Returns – 2 years

Gold-rolling-returns-2Y

Rolling Returns – 3 years

Gold-rolling-returns-3Y

Rolling Returns – 4 years

Gold-rolling-returns-4Y

Rolling Returns – 5 years

Gold-rolling-returns-5Y

Rolling Returns – 6 years

Gold-rolling-returns-6Y

Rolling Returns – 7 years

Join our 1300+ Facebook Group on Portfolio Management! Losing sleep over the markt crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community

Gold-rolling-returns-7Y

Rolling Returns – 8 years

Gold-rolling-returns-8Y

Only up to 8 years is relevant to sovereign gold bonds. It won’t hurt to see how gold has fared over longer durations.

Rolling Returns – 10 years

Gold-rolling-returns-10Y

Rolling Returns – 15 years

Gold-rolling-returns-15Y

Rolling Returns – 20 years

Gold-rolling-returns-20Y

Rolling Returns – 25 years

Gold-rolling-returns-25Y

So, what do you think the returns from Sovereign Gold Bonds* would be over the next 1,2,3,4,5,6,7,8 years? Might as well play the roulette!

  • let us ignore the enormous extra return of 2.75% that the govt wants to reward us with for buying these bonds instead of physical gold.

The future should be at least as risky as the past. If volatility scares you stay away from these bonds.

Personally, I think unless you can time your entry and exit, holding these bonds until maturity may just about give any return! Stay away if you cannot actively manage the huge risk associated with gold.

Over the short-term, the risk is way too high. Over the long-term the reward is often way too little.

There are much better and smart ways to accumulate gold for a marriage.

More posts on gold:

References

NSE circular on trading in sovereign gold bonds

RBI press release on Sovereign Gold Bonds, 2015-16

Do share if you found this useful
Join our 1300+ Facebook Group on Portfolio Management! Do not lose sleep over your bleeding portfolio: Learn how to reduce fear, doubt and uncertainty while investing for financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community

Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

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 topics of money management. 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 on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors 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. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. 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 kind of paid articles, promotions or 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 investingThis book is meant to help you ask the right questions, seek the right 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 low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new

This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when traveling, how traveling 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 Apps for your Android Phone

Comment Policy

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

2 Comments

  1. Could you please mention the better ways to accumulate gold for a marriage?
    Are gold bonds not a better alternative for those who are hell bent on buying gold any which way, especially physical gold even as jewellery?

Leave a Reply

Your email address will not be published. Required fields are marked *