Should you buy the new tranche of Sovereign Gold Bonds (SGBs)? Kirtan Shah decoded

Kirtan A Shah said in a tweet, “Should you buy Sovereign Gold Bonds (SGBs)? If so, should you buy the new tranche at 5561 or some old listed tranches and which of the 62 tranches issued so far?” And why? A wide one.”

According to Kirtan A Shah, let us first understand why SGB is above all other options

(1) Physical Gold – Buying gold from your friend Jeweler

1) Pro

(i) Tangible (You can touch it)

(ii) Buy in cash, secrecy, difficult to trace

(iii) No maximum limit on purchase

(iv) highly liquid

2) Opposition

(i) Hoarding/Theft

(ii) Purity (Fraud)

(iii) Making Charges (up to 35%)

(iv) Taxation Vs SGB is adverse

(v) GST – 3% on selling gold

(vi) Inconsistencies in pricing of gold traded by sellers and against adverse rates

(vii) no regulator

3) taxation

(i) STCG – less than 3 years, added to your overall income and taxed at slab rates

(ii) LTCG – Above 3 years, 20% tax with indexation benefit

Suggestion – Avoid, said Kirtan A Shah.

2) Digital Gold – Buying from Fintech Platforms – Paytm, Google Pay, Phone Pay, SafeGold, MMTC, Augmont Gold

Supporter

(i) Buy as low as Re. 1

(ii) Accuracy – generally won’t be a problem

(iii) Storage – You don’t have to worry

(iv) Immediate credit on sale

Shortcoming

(i) GST – 3% (You buy gold worth Rs 1000, you get gold worth Rs 970)

(ii) Spread – high difference between buy and sell price (another 2-3% for storage, insurance and trustee fees)

(iii) Absence of regulator

(iv) Maximum holding period – MMTC investors will have to compulsorily take delivery of 2 years or sell the purchased gold after 5 years or pay additional charges for non-delivery

(v) Taxation vs SGB is as unfavorable as physical gold

Suggestion – Avoid, said Kirtan A Shah.

3) Gold ETF – Buying through Mutual Funds

Supporter

(i) Buying at market price

(ii) Minimum – Rs. 50 & Max – No Limit

(iii) Storage and purity – you need not worry

(iv) No GST

(vi) physical delivery possible

(vii) Liquidity – T+1

(viii) Regulator – SEBI

Thief

(i) Taxation vs SGB is adverse, same as physical gold

(ii) Tracking Error – Actual returns may be slightly less than the index

(iii) Expense Ratio – Actual return may be slightly less than the index

(D) Suggestion – Better than physical and digital gold

4) Sovereign Gold Bond (SGB) – purchase through RBI on behalf of the Central Government

Supporter

(i) Issued at a discount – the current tranche is at 5561 while the current market price is 5611

(ii) Storage- You don’t need to worry

(iii) No GST

(iv) 2.5% interest is given by the government every year

(v) Taxation – No capital gains tax if you buy during launch or from the secondary market and hold it till maturity. But 2.5% interest is taxed at slab rates.

(vi) Sovereign Guarantee

Thief

(i) Unlike digital gold and ETFs where gold is actually purchased, it is not backed by the purchase of physical gold. But there is a sovereign guarantee.

(ii) Minimum – 1 gram, maximum – 4 kg

(iii) no physical delivery

(iv) Liquidity – It is an 8 year product. If you want to sell before 5 years, your selling price is the secondary market determined price which is usually at a discount due to low liquidity and current yield (will explain further)

Recommendations – The best product to invest in, said Kirtan A Shah.

5) But should we apply for fresh issue or buy the old tranches listed on the exchange?

So far 62 SGB cases have come on new pretexts. We have looked at all the 62 issues and all of them are trading at 1 – 5% discount to the 5561 price at which the new issue was launched.

While choosing which one you should invest in out of 62 old and new 63rd, you have to look at either of these,

(a) Discount available for new issue – It is a no brainer that the bond available at the highest discount is the one you should choose but there are ~40 such bonds trading at ~5% discount and hence you look at the current yield or YTM at last to take a decision.

(b) Current yield of old issue- 2020-21, Series VI, September 8, 2020 Bonds, if we look at the issue price- 5117 Interest payable = 5117 * 2.5% = 128 (The price at which you buy, 2.5% is payable on the issue price). Current market price = 5284.

(c) Yield to Maturity (YTM) – Current Yield = Interest Payable / Present Value, = 128/5284 = ~2.5%. So even if I buy this bond from the market at 5284, I will still get an interest of 128 which is ~2.5% which the new issue also pays.

So not only do I get it at a discount of ~5% in the secondary market but also make a yield of ~2.5%

(a) 5561 (premium of 5%) + buying fresh tranche at 2.5% yield OR

(b) Buying something at 5.33% discount but making 2.28% yield for remaining 7-8 years, said Kirtan A Shah via a tweet.