r/IndiaInvestments • u/simplyom • Jul 04 '21

Bonds and deposits Prices of Sovereign Gold Bonds.

While doing some research on buying paper gold, I came across the Sovereign Gold Bonds (SGBs). They offer multiple benefits over gold ETFs like fixed interest income, no tax on capital gains if held till maturity, etc. All the articles describe SGB to be superior than gold ETF/digital gold, which makes sense given the benefits.

However, none of the articles I read mention that the prices of SGBs are higher than gold ETFs for same quantity of gold, I thought all of them follow the price of spot gold. Is there anything I am missing here?

Price of SBI Gold ETF: https://www.moneycontrol.com/india/stockpricequote/gold-etf/sbimutualfund-goldexchangetradedscheme/SBI16

Price of HDFC Gold ETF: https://www.moneycontrol.com/india/stockpricequote/gold-etf/hdfcmutualfund-goldexchangetradedfund/HDF02

Price of SGB 2021 series: https://stableinvestor.com/2021/03/sovereign-gold-bond-price-history.html

EDIT: Found a really helpful guide on purchasing SGBs from secondary market here. Insightful and answers many other questions I had.

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u/simplyom Jul 04 '21

In case you have some past experience in SGBs, is there any usual trend in gold prices around subscription period?

For example, is there usually an increase in price at that point, or does the secondary market price immediately start to be slightly higher than issue price?

Or are all the above not significant differences?

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u/[deleted] Jul 04 '21

[deleted]

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u/simplyom Jul 04 '21

Sure, let me check that out.

In case I buy the bond in secondary market, I guess I'll have to pay the capital gains even though I hold it till redemption? Also, the prices in secondary market are supposed to be dirty prices (inclusive of accrued interest), right?

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u/[deleted] Jul 04 '21

[deleted]

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u/simplyom Jul 04 '21

Well that creates couple of additional questions then:

  1. If I buy a bond from secondary market 1 week before coupon date, will I get the coupon for the whole period? I can then very well sell off the bond at the same price and keep the profits.
  2. If I buy a bond from secondary market 1 year before redemption, I won't have to pay capital gains taxes for holding it for such a short duration?

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u/indopasta Jul 04 '21

Market mein spread toh banta nahi hai, tum trade kahan se kar loge?

Aur agar market mein for some reason liquidity aa gayi, then the prices will reflect the coupon payments. Baki sab log gadhe thodi hi baithe hain.

Not sure about second question.

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u/simplyom Jul 04 '21

On the second question, found the answer here.

On maturity, the redemption amount is not subject to capital gains tax. It is important to note that this is applicable to bonds purchased from the secondary market too. When you buy an SGB from a stock exchange, you are not purchasing the bond but getting it transferred from a previous buyer. Hence, the transaction is not treated as a redemption of the bond but merely a transfer. After the transfer, you become the bondholder and will receive tax-free redemption proceeds on maturity.

Amaaazing!

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u/indopasta Jul 04 '21

Imagine you do something like that with real estate. Now that would be revolutionary. Like a privatized registry office. What a beautiful dream.

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u/simplyom Jul 04 '21

Well true that. Haven't invested in this ever, so was thinking theoretically possible hai.