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Sovereign gold bond scheme: Should you invest in it with gold at all-time high?

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The Series-V of the sovereign gold bond (SGB) scheme 2020-21 opened for subscription on Monday and will end on Friday.

Sovereign gold bond scheme: Should you invest in it with gold at all-time high?

The Series-V of the sovereign gold bond (SGB) scheme 2020-21 opened for subscription on Monday and will end on Friday. This issue is available at a time when gold prices are trading at record highs.

As far as investing in SGB is concerned, it is generally considered a good bet as it provides interest along with price appreciation which no other gold investment offers.

However, with gold prices having risen sharply this year, some investors may have second thoughts over whether they should go for SGBs. This is because the current rates are much higher than the issue price of the first tranche.

The issue price of tranche V has been fixed at Rs 5,334 per gm, compared to  Rs 4,639 per gram in the first tranche, in keeping with the rise in gold price, though the SGB price is still less than the market price.

But before investors think of investing in SGBs, they should take a step back and first focus on their asset allocation.

Gold is traditionally used as a hedge against inflation and it is advisable to allocate up to 10-20 percent of investment portfolio in the yellow metal, says Nish Bhatt Founder and CEO, Millwood Kane International.

This means somebody who already has the required allocation in their portfolio shouldn’t invest further.

"Gold has had a phenomenal run this year, with an appreciation of over 36 percent since the start of the year, but past performance is no guarantee for the future," says Bhatt.

On the other hand, investors who do not have proper allocation to gold may invest in SGBs.

SGB is an easy route to enjoy exposure to the yellow metal as it is a substitute for physical gold, can be easily sold through banks and designated government offices. Investors get an annual interest rate of 2.50 percent and capital gains at maturity, if any, are tax-free.

Investors who may miss investing in SGBs, still have a chance as the sixth and the final tranche of the issue will open from August 31, 2020 till September 04, 2020 and online subscription will get a discount of Rs 50/gm.

SGBs, meanwhile, can also be bought from secondary market, that is buying it at the exchange from investors who had purchased previously and wish to sell.

"The liquidity in SGBs is a little less in case of secondary markets. So, sellers cannot sell it at more than the current prices," says Ketan Kothari, Director of Augmont.

Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions.

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