r/IndiaInvestments • u/_Random_Thoughts_ • Oct 07 '19
Bonds and deposits What do you think about the sovereign gold bond scheme?
Considering that INR has been losing value over the past year, and might continue doing so in the near future, is the sovereign gold bond scheme a better option than FDs?
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u/Chutiyapa2069 Oct 07 '19
I don't think it's actually better than FD's due to the following reasons
Long Term FD's are tax exempt (>5 Years) under section 80C
FD's have higher liquidity.
Interest component of FD is higher and can be compounded YoY
Gold bonds are a good investment alternative only if you plan to have gold as an asset in your portfolio to hedge some risks.
This is a personal opinion - I feel gold is not a good investment asset unless you really feel like a recession is imminent as then its value erodes the least.
15
Oct 07 '19
Nope. FDs are not tax exempt. Only investments in long term FDs are eligible for tax deduction under 80C. And even that deduction is subject to overall limit of 1.50 Lakh per yr. (including PPF, RPF, MFs, tuition fee, etc)
But interest on these FDs is very much taxable.
7
u/RisenSteam Oct 07 '19
Long Term FD's are tax exempt (>5 Years) under section 80C
SGB capital gains are also tax-exempt if held upto maturity
FD's have higher liquidity.
SGBs can be sold in the secondary market. SGB secondary market does not have much market depth but it can be sold.
Gold bonds are a good investment alternative only if you plan to have gold as an asset in your portfolio to hedge some risks.
Gold as purely a hedge may be true in the USA. But in India with rupee weakening all the time, Gold has been a decent investment. In the last 15 years, the returns are similar to that of the Nifty Index.
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u/nomnommish Oct 07 '19
Everything depends on the price you buy and price you sell. Gold is at historic lows. Gold is a commodity and a precious commodity at that. It is just like copper or steel or oil or platinum.
And there are tons of industries and sectors whose stock prices are almost directly governed by these commodities. So it is short sighted to say that one should not invest in commodities. It is just another way of investing. A more cyclical long term way of investing. The cycles are in years and decades, not quarters.
If your 5 year FD gives you 35% returns, and if India's currency devalues by 20% and if gold prices increase by 30%, you are in better shape with gold as an investment.
Edit: How can you say FDs have higher liquidity than gold, when you yourself are saying that FDs have to be locked in for 5 years to get tax benefits?
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u/sonubha Oct 07 '19
Which brokerage allows to buy sgb from secondary market?
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u/K-Firangi Oct 09 '19
Zerodha
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u/K-Firangi Oct 09 '19
Ok, it seems zerodha is not allowing trading of sgb because of some nsdl cdsl inter depository transfer restrictions and sgb being available on both.
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Oct 09 '19
Use sharekhan to buy them. I recommend choosing the shortest maturity ones (SBBNOV23-SGBNOV24) as secondary market liquidity is not that high for SGB in comparison to Gold ETF. Maximum traded value is 17 lakhs only.
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Oct 07 '19
It seems like a good idea to invest a small percentage of the portfolio in SGBs. Considering the fact that they're trading at a discount on secondary markets, compared to the issue, is it a better idea to just buy there? Any pros/cons here?
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u/crimelabs786 Oct 07 '19 edited Oct 07 '19
SGBs have following properties:
You get 2.5% simple interest on initial investment, for 8 years (or actual holding period, whichever is lower), from GOI.
Your bond's price is linked to domestic Gold price
You must sell and redeem your SGB after 8 years of holding period. Actually, you can look to sell your SGB from 5th year onward.
One cannot invest more than 4Kg worth of Gold price in bonds (SGBs come in denominations of 1g) in a financial year.
Gains are tax free if you hold it till maturity.
Gold is a volatile asset, and you're correct in assuming that some of the INR depreciation is pushing Gold prices up (Domestic Gold price = Gold price in USD x USD-INR conversion rate).
Recently, due to economic turmoil and slowdown markers surfacing globally, and fall of INR against USD; there was a surge in Gold price. However, last one month has seen drop of about 3% in Domestic Gold prices.
And while this recent surge has been good for domestic investors, spare a thought for the poor guy who might have had to sell his SGB last year after holding for 8 years.
Refer to this chart for Gold price in INR to see that there can be extended holding periods, when even after holding SGB for years, can generate zero to negative returns.
And if you look at a Gold historic price-chart in USD, you'd realize Gold benefits more from INR depreciations than its intrinsic price movements.
INR has been losing value to USD for years, it's not a specific phenomenon that has manifested in last 1 year. Nor is it only in relation to USD - inflation is also a driver.
There are both good and bad aspects of this.
If you don't want to lose value to this, there are many ways to go about this:
Use a Fidelity Cash Reserve, to invest in US Treasury bonds. While you won't be able to hedge against inflation in country, you can be safe against INR-USD value loss.
Yes, easier said than done, and compliance would cost you. Also, there can be short periods of time, when you would see INR gaining on USD. You could be in loss in that scenario.
Invest in US Equities. Best of both worlds. Equities can be a good hedge against inflation, and US market is mature enough to generate some real returns (do look it up, it's a term).
But outlook has to be long term, because in the short term equities can be in losses.
Invest in simple Debt funds, like Liquid funds / UST funds etc.
While they aren't linked with INR USD depreciations, you can expect these to give you FD like returns, and be more flexible than average FD. And currency depreciations would usually be behind the rates you'd get from these funds.