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  • MF News Will sovereign gold bonds pose a threat to Gold ETFs?

    Will sovereign gold bonds pose a threat to Gold ETFs?

    Gold ETFs may lose sheen as sovereign gold bonds can deliver attractive yields along with liquidity, say experts.
    Nishant Patnaik Jun 16, 2016

    In a bid to curb the demand for physical gold and curtail excessive dependence on gold imports, the Ministry of Finance has introduced Sovereign Gold Bond Scheme (SGBS) last year in October. Similar to Gold ETFs, this scheme enables investors to hold gold units in paper form.

    Initially, SGBS was treated as physical gold for taxation. That means, if an investor sold these bonds through an exchange within three years, the gains, if any, would have been taxed at the marginal rate of taxation. Similarly, long term capital gains arising out of sale of bonds after three years was taxed at 10%. Also, the entry and exit points were fixed by RBI.

    Investors can invest only when RBI issues such bonds. Also, these bonds come with a maturity of five and seven years.

    In a bid to make SGBS more attractive for investors, the Union Budget 2016 has made SGBS eligible for indexation benefits which is available in Gold ETFs.

    Last week, these bonds were listed on NSE, which makes them more liquid by providing an easy entry and exit point to investors. Simply put, SGBS now scores over Gold ETFs on all fronts.

    SGBS, on paper, looks superior to Gold ETFs. Firstly, there is no expense ratio in SGBS, which means there is no tracking error, like in the case of Gold ETFs. Also, these bonds are expected to offer a minimum yield of 2% which is over and above mark-to-market value of gold. This will offer higher returns to investors. Also, these bonds come with a maturity of five and seven years.

    Most industry experts and advisors whom Cafemutual spoke to are of the view that SGBS has an edge over Gold ETFs. In fact, Gold ETFs have been witnessing continuous erosion in assets for the past few months.

    The CEO of a large fund house said that SGBS is the best investment option for those who want to take exposure to gold. He feels that the trading of Gold ETFs will continue to decline due to attractive returns offered by SGBS. However, we have to see the volume of trading of SGBS on exchange platforms in the days to come, he added.

    Pankaj Mathpal of Optima Money believes that SGBS has many advantages over Gold ETFs. “Since both are traded on stock exchanges, investors can obviously see the price differential between both the securities due to tracking error in Gold ETFs. Also, the additional return of 2% is a bonus in SGBS. In addition, SGBS is backed by the government of India which gives a sense of security to investors. Thus, Gold ETFs will definitely loose sheen in the days to come,” he said.

    Suresh Sadagopan of Ladder7 Financial Advisories seconds Pankaj’s views. “The sovereign bonds are certainly more attractive as they offer 2% return above the mark-to-market gain/loss. Also, liquidity may not be an issue because these bonds are now listed on commodity exchanges. Gold ETFs and gold funds will certainly lose sheen.”

    However, a few experts have a different view. Himanshu Vyapak, Deputy CEO, Reliance MF says that most investors who invest in Gold ETFs prefer SIP route. “Considering the volatility in gold prices, investors can get benefits of rupee cost averaging by investing systematically in Gold ETFs. SGBS doesn’t provide such an option,” he points out.

    “Trading of SGBS will solve the problem of liquidity. However, liquidity has to come with the right price. There are various factors which determine price of a security in the market. We have to see how close SGBS will be traded to the price of gold,” says Hemant Rustagi of WiseInvest Advisors.

    IFAs can also sell these bonds. Distributors get 0.5% as commission to sell SGBS.

    Have a query or a doubt?
    Need a clarification or more information on an issue?
    Cafemutual welcomes all mutual fund and insurance related questions. So write in to us at newsdesk@cafemutual.com

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    4 Comments
    akshay Shah · 8 years ago `
    How to sell these bonds ?
    Nishant · 8 years ago
    Hi Akshay,
    You can sell this bonds by becoming a sub broker with any nationalized banks.
    KS · 8 years ago
    Only area where ETF scores is there is no restriction on no. of units wheras Gold bonds purchases are restricted to 500 gms per year
    Reply
    C N ANNADURAI · 8 years ago `
    As in the case of SGBS eventhough there are lesser expenses ratio as mentioned by Mr N.ishank Patnaik, there are every possibility of facing a loss to a considerable extent by the buyer / investor once the prices of gold gone to the deep abnormally.
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