Tap Sovereign Gold Bonds to diversify your portfolio

There’s so much uncertainty flying around in the world with trade wars remain unresolved; the US Fed though has hinted at pausing on rate hikes for now, the political noise within the US still unsettling with the longest Government shut down in history till date.

The nascent inflation which was desired for a while in the western world was trimmed down with the continuous rate hikes which made it benign now and is threatening the little green shoots of growth in the US.

Suddenly, China which was a closed economy till about four decades has now turned a champion of open trade and markets. Of course, the growth there is also stuttering despite the nation’s open taps to liquidity and consistent policy play.

The other major economies like Japan and the European Union are in turmoil. The latter is also struggling its own unity with the UK moving out of the block by the end of this quarter. The growth of other major powerhouse of Europe, Germany is also fraught with the global imbalances.

The US central bank is in a hurry to offload the assets (quantitative tightening) it has accumulated during the financial meltdown; both exercises are unprecedented.

The US dollar which rallied strong since the election of the current President (with a slew of corporate tax incentives, etc) has started to peter down in the second half of last year.

The EU after the tamper tantrums is also inching towards tightening by next year. The tariff wars which started with an initial set of threats have reached a crescendo with a negative impact on the overall global trade.

With this backdrop, the riskier assets like equities have taken a hit with an increased volatility in the past few months and has created jitters in the investors’ minds.

Although, these situations remained all through the past year, 2018; the interest in the safe metal, Gold, has begun only in the last quarter as the US dollar began to weaken.

As a result, the investments into the global Gold ETFs (Exchange Traded Funds) have seen an upsurge in the coinciding days. This year, most analysts and experts also view that it would be beneficial to add a portion of the portfolio into Gold to not only bring stability to portfolio but also to make gains of this exposure.

Indian households which horde gold in the form of jewellery is the largest source of consumption of the imported gold into India.

Indian Government whose current account (difference of imports and exports) imbalance is largely accrued to the crude and gold imports has taken steps to control the deficits by introducing Sovereign Gold Bonds.

These bonds offer simple and seamless ownership of gold in paper or demat form. This thus excludes the physical possession and safety from the otherwise physical storage; hence no making charges, GST, etc.

The tenor or tenure of these bonds is for a period of 8 years with an exit option from fifth year onwards, the call (exit) option should be exercised on the interest payment dates only.

These bonds could be invested by individuals, HUFs (Hindu Undivided Family), Trusts, Universities and other charitable institutions. These bonds are denominated in units of one gram of gold and multiples thereof with a minimum permissible investment of 1gm of gold.

The maximum limit for subscription is 4 kg for individuals and HUFs while it’s 20 kg for trusts and other institutions. These bonds come with an interest of 2.5 per cent payable semi-annually.

The tax treatment of the interest earned on these bonds is considered as per the capital gains. There is no capital gains tax upon redemption, but an indexation benefit is provided for investors trading these bonds. These bonds could be used as collateral for loans.

The other important feature of these bonds is the transferability which are treated at par with that of provisions of the Government Securities Act.

These bonds are tradable on the stock exchanges within the fortnight of the issuance date. As a robust portfolio in the medium to long term one could use these bonds as a good diversification tool.