In an exclusive interview with Business Standard’s Bindisha Sarang, Vishal Dhawan, Board Member at ARIA, delves into the benefits of the laddering technique for Sovereign Gold Bonds, offering key insights for long-term investors seeking to overcome liquidity challenges.
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Sovereign Gold Bond 2324 Series 3 is open for subscription from December 18th to 22nd today we have with us Vishal davan board member Association of registered investment advisor with us thank you so much for joining us today Vish it’s a pleasure thank you for having me over yeah so V my first
Question is why is it that t all experts seems to recommend uh Sovereign Gold Bond so there are a few big advantages that um you know clearly sovereign gold bonds come with number one is the fact that um unlike other instruments where you know gold traditionally has never
Paid any sort of interest and it just gets put away in a locker somewhere and you hope for capital appreciation over a period of time The Sovereign Gold Bond is the only instrument available today which actually allows you to earn an interest every year of about 2 and a
Half% uh there for giving you some yeld in addition to the capital appreciation which may happen over a period of time the second thing which is the big advantage that it has is that if you hold the bond for eight years then the capital gains that you
Make on it are actually entirely taxy which is again unlike physical gold or other instruments that you can use to buy gold where you will end up having to pay some tax when you make a sale and uh last but not the least is clearly the fact that it takes away the
Hassle of buying physical gold uh you know uh storing it ensuring that it’s secure Etc because you can just buy it in a paper format and that Bond actually sits in your demat account which is very very useful so clearly uh this is a good instrument but uh what’s the best
Strategy when it comes to buying Serv gold BS so I think the way to think about it is you know there are clearly um you know with those advantages there will be disadvantages that you also need to keep in mind while you build your strategy so
Number one is the fact that you know if you need liquidity on gold and a lot of people buy gold because it’s a very liquid sort of asset uh because if you run into a problem you just go somewhere and convert it to to real money The Sovereign Gold Bond once it’s
Bought is not a very liquid instrument because you have to find a secondary Market uh to actually sell it and you normally find that that market is either a place where you will not find someone to buy it or maybe you’ll find someone but they will not be willing to pay the price
That you want to get on it because they understand that you know you are in a situation where you needs the money importantly so I think you need to keep in mind that the liquidity on the instrument is limited and therefore the way to think about it is when I’m buying
I need to be clear about what is my holding time around if I’m buying for a short period of time then I want to be careful because this instrument may not be the right instrument the second is because I have to hold for eight years I
Have to be able to predict in some way what will be the price of gold 8 years from now which is impossible to predict for anyone U whether you go to an expert or not the fact that you know it’s an asset which can go up and down depending
On so many factors will have to be kept in mind so what we therefore suggest to uh to investors is that when you’re buying try to buy in trenches let’s say you decide that you want to put away an x amount into a sovereign Gold Bond
Don’t just buy it in the next issue that is available because you’re saying I want to just be done with it at one time what you want to do is you want to buy grad over multiple issues you’ll typically find that there will be three four issues a year that will keep coming
Through and therefore it’s sort of an a little bit of an sip that you’re doing it gives you two adant advantages one is it allows you to buy at different points depending on what gold prices are at that stage and secondly which is probably even more important is that all
Of this money will not mature together at the same time and therefore you get something similar to what happens with maybe bonds where you create a ladder where there are different majorities at different points because you can’t predict the actual outcome that exists and uh lastly you know two
Remember that in your strategy also um because the liquidity on the secondary Market is not very high the primary Market whenever it opens up like you mentioned you know the next issue is opening on 18th becomes a point at which you want to think about making some of those allocations because it’s not
Available on tap which means it’s always available unlike a mutual fund or a stock you can buy it at any time so can people actually lose money uh because of sovereign gold bonds and how so actually um they certainly can you know as much as there’s this belief
That you can never lose money on gold uh you certainly can uh because it is an asset which goes up and down in value gold now for this to be well understood you have to go back to understanding what are the triggers for gold prices so
If you’re a gold investor in India there are two drivers of gold prices one is the price of gold itself in the international market and obviously there are times where does very well uh for example just a few weeks ago when the Israel Hamas geopolitical issue
Broke out you found all of a sudden that gold prices piped very sharply um and they went up similarly there’ll be other points at which when interest rates have been going up you will find that gold prices in dollar terms go down so one of the determinants
On how gold does is clearly just the performance of the price of gold which can be up or down the second determinant is going to come from how the rupee performs against the dollar because at the end of the day there is a rupy value
Of gold that you are seeing when you buy into a sovereign Gold Bond and uh traditionally the rupe has always depreciated against the dollar over a long period of time and therefore you have got an extra return in gold which has come because of the rupe depreciation now if there is a scenario
Where the reversal happen for a long period of time where the rupe actually appreciates against the dollar then this will actually work against a gold investor and this will work against a gold investor irrespective of the type of instrument he or she is using whether you’re using a sovereign Gold Bond
Whether you’re using an ETF whether you’re buying physical gold all of them will get impacted if the rupee appreciates against the dollar so while the probability of this happening over eight years is not very high I think one should not say that it can never happen
That uh you know gold prices cannot come down over an 8y year period there have been instances in the past where even over 10 year periods gold prices have literally been close to zero in which case there has been opportunity cost that investors have had to Bear saying
That I could have kept the money in a fixed deposit or some other instrument where I could have been bettered all uh Vish my second last question to you is what should be the overall gold in your portfolio and in this gold portion how much should be physical gold
Gold mutual funds gold ETFs Sovereign Gold Bond if you can give give our viewers a quick breakup so first of all the role of gold in a portfolio needs to be well understood so normally you will find that gold works well as a asset class that behaves differently from how
Equities behave so it’s a very um it’s sort of your counterweight in a portfolio that you would look at and therefore we would say that for most investors they should be looking at between five and 10% allocation to Gold to essentially control the downside on their portfolio and other things go
Wrong while they’re doing this they need to account for other goal that they may have in the form of Investments as well because very often the way investors look at gold as an app classes they tend to count each instrument investing in gold as a separate investment itself
Which is not the right way to do it so the way to think about it is I could have gold in multiple forms I could be holding maybe some bars biscuits coins Etc which also I can convert to cash if required or which also goes up and down
As gold prices move up and down that’s number one number two is I could have gold in a paper format already in the form of an ETF or in the form of a gold mutual fund and the third thing I could do is now look at sovereign gold as well
Whether I want to account for jewelry that I use for um you know for consumption is very I think most families that we have seen um looking at the Gold literally don’t know the value of their gold ex well and the way that they think about it is
Don’t count it in my gold Holdings at all because I would never ever sell it unless it was a real crisis that our family is going through and therefore if you look at just these three buckets gold ETF mutual funds one bucket physical gold one bucket sovereign gold
B one bucket this combination should be that 5 to 10% at your overall L now once you made that decision it now becomes a function of how important is the liquidity on my gold and how much am I going to try to time my entry into gold
Um when I’m making the decision if I’m very comfortable with holding for 8 years think that really I’m not going to pull this money out in any situation then clearly The Sovereign Gold Bond is the best option because it’s giving me that two and a half% and it’s giving me
A taxfree return on top of it and I would then say that maybe you could look at get all your gold allocation being only in this kind of an instrument as long as you buy it in a staggered Banner if however you feel that you know I do
Want some part of it to be liquid then clearly you know having um half of it in the combination of physical gold and gold ETFs or gold mutual funds is a good option and U again you know even when you’re doing that it’s important to stagger your purchases because it’s very hard to
Predict how gold prices will move in the short term clearly people investors should climb this Golden Ladder but my last question to you is is there any kind of investor who should absolutely not enter uh you know this kind of instrument or buy Sovereign go
B so I think there are two types of investors have to be very careful one is those who need liquidity uh like we discussed earlier liquidity on this instrument is very low and therefore U you know if they’re going to like if they’re likely to require it you know
Maybe they take loans against the gold otherwise maybe they actually sell physical gold or they sell the gold ETF if required then the Sovereign Gold Bond doesn’t really fit in I mean on paper there is liquidity but in the real world there isn’t enough so that’s one set of
People who should not buy the second is that the taxfree nature on maturity is very valuable for those people who are in a higher tax bracket if you’re in a very low tax bracket anyway that may not be as large a benefit and therefore the benefit that you’re really
Getting then in the Sovereign government is the 2 and a half% of interest that you get per year um and that’s and you’re trading that off against liquidity on the other side so I think lower tax investors may want to give it a careful thought on whether they really
Want it and clearly anyone who requires liquidity I think they should they should think many times before they going for the Sovereign world bond thank you so much for your inputs and your time today V you have a lovely day ahead thank you so much it’s been a pleasure
2 Comments
Nice. Informative.. Good interview, Bindisha.
Thanks for sharing