Should You Buy Discounted SGB on Exchange?

recent issue of sovereign gold bond (SGB) which was open from 28 February to 4 March, the price was 5,109 per gram of gold. The issue price which was open for subscription during January was 4,786 per gram. According to the India Bullion and Jewelers Association, the price of gold on March 8 is 5,341 per gram.

However, most SGB trading prices in the secondary market on the exchange do not reflect recent price action in spot gold prices. Most bonds are trading below 5,000 per gram level (at a minimum discount of 5.6% on spot prices).

Why is it like this?

Experts say that one of the main reasons for SGBs to trade at a discount in the secondary market is poor price discovery mechanism due to lack of adequate liquidity.

Rahul Roy Chowdhury, Business Head, Wealth, Equirus, said, “Most trading in gold takes place in the physical market and hence price discovery in these markets is faster and also more liquid than trades on exchanges.

Another factor that can affect SGB prices in the secondary market is the return at which SGBs are available for investment.

Viral Shah, Executive Vice President and Head, Commodities & FX at IIFL Wealth, pointed to an SGB issued during 5-20 November 2015. 2,684 @ 2.75% coupon (recently released SGB has 2.5% coupon).

“Since the coupon payment of 2.75% is paid on the issue price and not the market price” 5,000, the current bond yield is around 1-1.5% per annum (taking into account coupons is the only return),” Shah said.

Shah said, in our observation, we sometimes see that SGBs with maturities of less than two years are closer to the current spot prices than those with residual value of more than 5 years.

This is why SGBs maturing in 2023 and 2024 are trading between 5,023 more 5,255 per gram, while the remaining SGBs maturing between 2025 and 2029 are trading below 5,000 level as per Religare Broking data.

should you buy

The mere fact that SGBs are traded at a discount in the secondary market should not be a deciding factor for investors to buy.

SGBs of different tranches have different maturities. Experts say that those who can hold the investment till maturity can consider buying SGBs in the secondary market.

Vishal Dhawan, Founder and CEO, Plan Ahead Wealth Advisors said, “Because, if investors choose to exit the secondary market before maturity, they may face the same pricing inefficiency challenges that they are now benefiting from. “

One can also lose tax benefits on gains earned on SGBs, which would otherwise be available if held to maturity. If you hold the bond till maturity, capital gains, if any, are exempt from tax. SGBs sold prematurely in the secondary market are taxed at 20% on capital gains and held for more than 36 months with indexation benefit. Short term capital gains are taxed at the income tax slab rate of the individual.

Dhawan also suggests that investors should check their asset allocation before investing in SGBs. “Once they decide, there is a need to increase the allocation of gold in their portfolio and if they can hold till maturity, then, I think this is one of the ways to buy in the secondary market,” said Dhawan. Have a good time.”