Mumbai: Investors can take advantage of recent softness in gold prices to allocate funds for the second tranche of sovereign gold bonds (SGBs).
With the union budgimposing tax on the gains from gold mutual funds and ETFs in line with income slabs, financial planners believe SGBs are the most efficient way to allocate money to gold for the long-term investors.
This second tranche of SGB will open for subscription during September 11-15. Investors will have to pay ₹5,873 per gram of gold after a discount of ₹50 per gram for digital payments. This is ₹3 per gram lower than the ₹5,876 a gram that investors paid in the previous tranche in June 2023.
Domestic prices have fallen about 4% since May when they touched a high of ₹61,500 for 10 grams. Over the last one year, gold prices have risen 16.56% in rupee terms, while in dollar terms they are up 12%. Gold has rallied due to buying by central banks in the last couple of years to build up their gold reserves. With talks of an interest rate cut in the US fading, analysts expect gold prices to be range bound in the near term as investors wait for further cues from the US Federal Reserve.
“More rate hikes or bets for more rate hikes by the Federal Reserve and growing narrative of a US soft landing will keep a lid on prices in the near term,” said Ghazal Jain, fund manager at Quantum Mutual Fund.
She sees a limited downside for gold, in the wake of worries about Fed overtightening, a potential US recession, rising US debt levels, sticky inflation, central bank gold buying and geopolitical tensions.
Wealth managers say investors should not ignore the importance of gold in portfolios, given the uncertainty around interest rate and an expected slowdown in global growth, and build a 10% allocation to gold.
“Gold is expected to outperform most asset classes due to the anticipated slowdown in China and other major economies including the US,” said Colin Shah, managing director, Kama Jewelry.
The union budget for FY24 has made investment in gold through ETFs and mutual funds less attractive. These funds will no longer have benefits of long-term capital gains tax and any gains will be taxed at the marginal tax rate from April 1, 2023, while any capital gains on SGB are tax free if held to maturity.
Hence distributors believe that holding gold as part of long-term portfolios through SGBs is the best bet for long-term investors, as these bonds provide an additional annual interest income of 2.5%, and there are no making charges and storage cost.
“SGB is the most tax efficient vehicle available for an investor looking to allocate to gold,” said Anup Bhaiya, chief executive of Money Honey Financial Services.
SGBs have worked well for investors ever since they were launched in November 2015. The first tranche of SGBs in November 2015, which will be redeemed after completion of eight years later in 2023, was allotted at 2,684 per gram. At the current price, investors have earned an absolute return of 120% on the price of gold.
