Benefits Of Buying Sovereign Gold Bonds In The Secondary Gold Market
Amid market volatility and economic downturns, gold has always been able to hedge against inflation. Over time, the price of gold has always followed the y-axis of the graph; hence its asset appreciation quality in the long-term compelled investors to put it on the investment group. Further, by investing in gold, one can diversify the portfolio and ensure other factors like liquidity and tax benefit.
While previously, investment in physical gold has been the prime mode, now there are several ways through which investors can invest in gold. Sovereign Gold Bond is one such investment option. As per the RBI FAQs, Sovereign Gold Bonds are Government securities that are denominated in grams of gold. These are substitutes for holding physical gold. Here, investors have to pay an issue price in cash, and they can redeem bonds in cash after maturity. The Reserve Bank of India issues these bonds.
This piece will help potential investors understand the benefits of buying Sovereign Gold Bonds via the secondary market. Stay tuned!
Buying Sovereign Gold Bonds Through The Secondary Gold Market
When a company issues security for the first time, they offer it to the public in the primary market. After that, when the Initial Public Offering is completed and stock is listed, these securities become available in the secondary market and can be traded in the same.
The first process is direct, as investors can get securities directly from the issuing company through IPOs. On the other hand, investors can purchase securities from other investors willing to sell the same.
Sovereign Gold Bond was first introduced in the market in November 2015 and had been sold in 56 tranches. These bonds are listed and traded, especially in the cash division of BSE and NSE. Retail investors have the opportunity to purchase and sell Sovereign Gold Bonds from the secondary market.
Note: Buying prices of all these tranches (as of Friday closing) are lower than the issue price of fresh series. This is because sellers wish to receive a discount in return while exiting from the instrument.
So, it is clear that investors can purchase from secondary markets through their demat and trading accounts. The RBI issues tranches throughout the year. So, investors who have missed the opportunity of buying a particular tranche will have to wait for the next issue. Further, they can avail significant benefits by purchasing from the stock exchange, i.e. secondary gold market. However, do not forget to assess certain factors as well.
Benefits Of Purchasing A Sovereign Gold Bond From The Secondary Gold Market
Here is a list of benefits that investors can avail themselves of by purchasing Sovereign Gold Bond from secondary market. Further, the factors investors need to consider are also explained below-
Investors know that liquidity plays a crucial role in the secondary market. They cannot randomly buy the Sovereign Gold Bond series. The series must have a high liquidity quotient to align with investors’ demand. Sugandha Sachdeva, VP – Currency & Commodity Research, Religare Broking, says, “If we look at the top traded issues, the average daily volume is around 5,000 grams”.
Investors must know that Sovereign Gold Bond provides 2.5% interest twice a year. Investors receive this interest on the issue price of a specific series and not on the purchasing price in the secondary market. Hence, investors must not settle for the lowest trading price when purchasing from the secondary market. Alternatively, they must assess the issue price. The buying price must be lower than the issue price.
The ideal scenario would be selecting from available Sovereign Gold Bond tranches from the secondary market after evaluating liquidity factor and purchasing at a discount rate.
It would be better to buy top traded series; hence redemption would be hassle-free without high volume constraints.
For instance, the purchasing price of the top liquid series, SGBAUG28V, after discount is Rs 4,775 from Rs 5,334 per unit. If investors tally it with fresh series initiated on a particular day, the SGBAUG28V series will offer a reduced purchasing price per unit. Additionally, it will provide a higher interest component. The SGBAUG28V series will mature a year earlier also. No wonder SGBMAY29I and SGBJUL28IV seem attractive and lucrative.
However, one must be careful about choosing SGBMAY28 as it may not prove to be a perfect choice. Wondering why?
The issuing price, in this case, is downwards than the purchasing price. While investors will avail units at much-reduced prices (e.g. ₹4,689.99 per unit) when compared to the fresh issue priced at ₹4,791, and the assured interest of 2.5% on the investment amount will also reduce. If investors had subscribed to fresh issues, they would have received a higher interest component.
Investors purchasing Sovereign Gold Bonds from the secondary market can increase the overall return by providing a discounted price to the fresh issue.
Another significant benefit of buying Sovereign Gold Bonds is tax benefits. If investors sell Sovereign Gold Bonds at maturity, i.e. after eight years, then they do not have to pay any tax on capital gains. This condition remains the same even when investors purchase Sovereign Gold Bonds from the secondary market for the residual maturity.
According to the Income Tax Act, if investors redeem Sovereign Gold Bonds at maturity, they do not have to pay on capital gains. Therefore, it is clear that if investors purchase Sovereign Gold Bonds from the secondary market, they will receive a tax-free treatment at maturity/redemption. This is because sellers have been paying the Government taxes for the entire holding period.
Seems confusing? Let us simplify the explanation further. Suppose investors purchase units of a series in the secondary market, i.e., stock exchanges. In that case, it will mature after eight years; hence capital gains on maturity will have the same tax-free treatment.
On the other hand, if investors opt for physical gold, they will have to pay short-term capital gains tax (STCG) as per the investor’s applicable tax slab rate. Further, the long-term capital gains tax is imposed at 20% with indexation.
Return on Sovereign Gold Bond is market-oriented. Additionally, the return depends on applicable gold prices on maturity (after eight years) or before that. Hence, investors willing to get a higher return can opt for other types of bonds available via online platforms like KredX.
Here, investors can select a number of units and invest in the available list of bonds. Further, investors can reap the benefits of the digital process and the assistance of dedicated Relationship Managers.
The introduction of the sovereign Gold Bond in the investment arena made investing in gold more manageable. While investment is open in both primary and secondary markets, one can notice a low trading volume of Sovereign Gold Bonds in a stock exchange. However, if investors choose to purchase it from the secondary market, they can secure several benefits, such as tax benefits. The benefits multiply when investors purchase a liquid series with a lower trading price than the issue price and a fresh issue.