Worried about equity swings? Buy sovereign gold bonds, say experts

Mumbai: Investors, who expect the uncertainty in equity markets to continue in the foreseeable future, could buy sovereign gold bonds, said investment advisors. The government has launched the sixth tranche of the Sovereign Gold Bond Scheme, which will close on October 25. A fixed return over and above the gains from the price rise of gold has made this product popular among investors.

“Equity markets across the globe are overvalued and there are no investment options with as much as $17 trillion is invested in negative yield bonds,” said Amit Jain, CEO, Ashika Wealth Advisors. “Given this scenario, adding gold to investment portfolio is a good bet.”

Wealth managers believe the outlook for gold is positive despite prices having moved up by 19.31 per cent over the last one year. It has been one of the best performing asset class outperforming equities and debt of late. In the last one year the S&P BSE Sensex has gained 13.43 per cent, while an investment in a liquid fund earned 6.84 per cent. However, over 3-year and 5-year periods, the yellow metal has gained only 6.94 per cent and 5.68 per cent, respectively.

Wealth managers believe investors should have 5-10 per cent gold in their portfolio. Using sovereign gold bond route is the best bet given that there is zero expense ratio. Investors also get a 2.5 per cent interest. Gold bonds score on the taxation front as they do not attract capital gains tax if held until maturity. Investors will get gold bonds at Rs 3,835 per gram of gold, while those applying digitally will get a discount of Rs 50 per gm at a price of Rs 3785 per gold.

“Sovereign gold bonds is the best route to hold gold as part of asset allocation. However, investors must be careful not to hold it as part of emergency corpus as liquidity is not high in these bonds,” said Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Sovereign gold bonds have a tenor of eight years, with investors having the option to exit after the fifth year on interest payment dates. The redemption price will be the simple average of the closing price of gold on the previous three days.