Should PPF and bank FD investors bet their money on sovereign gold bonds? Read this.
Investors in India have traditionally relied on Public Provident Funds (PPF) or fixed deposits (FDs) for stable and guaranteed returns. However, diversifying one's portfolio is a wise strategy to optimize returns and mitigate risks. One promising avenue for investment is the Sovereign Gold Bonds (SGBs) offered by the Reserve Bank of India (RBI).
Investing in SGBs provides a hedge against inflation, unlike PPFs or FDs, which have been affected by inflation over the years. The prices of gold, on which SGBs are based, tend to move in the opposite direction of the economy. When the economy weakens or inflation rises, gold prices typically rise, protecting investors' purchasing power.
According to Sriram BKR, Senior Investment Strategist at Geojit Financial Services, gold can be a viable alternative for investors looking for diversification apart from equities. Over the past 10 to 15 years, gold has proven to be the second-best performing asset class in India. SGBs offer a fixed interest rate of 2.5% per annum, payable semi-annually. Additionally, SGBs give investors the opportunity to participate in the price appreciation of gold over the long term.
SGBs have a tenure of 8 years, with premature withdrawal allowed after 5 years. Historical data suggests favorable outcomes for gold investments over various time spans. For a 5-year duration, the average returns stood at 9.1%, with positive returns occurring 83% of the time and returns exceeding 7% in 55.5% of cases. Similarly, for an 8-year period, the average returns remained at 9.1%, with positive returns observed 96% of the time and returns surpassing 7% in 57% of instances. Considering the SGB interest, the likelihood of positive returns and returns exceeding 7% would likely improve. Remarkably, for an 8-year investment horizon, positive returns were observed 100% of the time.
Furthermore, SGBs offer exclusive advantages such as exemption from long-term capital gains tax on maturity and eligibility for indexation benefits on bond transfers. These advantages make SGBs an attractive option for investors.
Sachin Kothari, Director at Augmont, highlights that gold has historically delivered a compounded annual growth rate (CAGR) of around 12% over the last two to three decades. The recent maturity of two tranches of SGBs has shown returns of over 15% per annum. This, combined with the risk-free and tax-free nature of SGBs, the additional interest rate of 2.5%, and no storage costs, makes them a more favorable option compared to PPFs and bank FDs.
Ajinkya Kulkarni, Co-Founder and CEO of Wint Wealth, agrees with this sentiment. For investors in the highest tax bracket, the first tranche of SGBs has delivered a CAGR of 12.28% over 8 years, including both interest pay-out and capital gains. This shows that SGBs are a good choice for protecting capital against market volatility. They complement fixed-income instruments like PPFs and bank FDs, which provide slightly lower but more secure returns. Based on financial goals and risk profiles, retail investors can consider allocating about 10% of their portfolio to gold through SGBs.
In conclusion, investors should consider diversifying their portfolios by investing in sovereign gold bonds. SGBs offer a hedge against inflation and the potential for capital appreciation. With favorable historical returns, tax advantages, and a risk-free nature, SGBs present an attractive opportunity for investors to optimize their returns and protect their capital.
Analyst comment
Positive news: Investing in Sovereign Gold Bonds (SGBs) is a smart strategy to diversify and optimize returns, according to experts. SGBs provide a hedge against inflation and have historically performed well, with positive returns observed the majority of the time. They also offer a fixed interest rate and the chance to participate in the price appreciation of gold. Additionally, SGBs come with tax advantages and are a good choice for protecting capital against market volatility. Retail investors can consider allocating around 10% of their portfolio to SGBs.
