On Thursday, Prime Minster Narendra Modi launched the sovereign gold bonds scheme, along with a gold monetisation scheme and a gold coin engraved with the images of national emblem Ashok Chakra and Mahatma Gandhi on its two sides. The gold bonds scheme provides another alternative for buying gold as an investment. Currently, one can opt to buy physical gold or gold exchange traded fund (ETF) or gold mutual fund scheme. In terms of returns, the gold bonds scheme is attractive because the investor can earn 2.75% per annum (pre-tax) on his initial investment. The gold bonds have an eight-year tenure, while allowing an exit option after five years. The bonds will be traded in the secondary market, but liquidity will be a big question.

Should you invest?

If you are looking to accumulate gold for a specific occasion 5-8 years down the line, you may consider putting money in the scheme. However, if you wish to buy gold bonds for the sole purpose of investing, you should avoid this scheme.

As Moneylife has always cited in the past, gold is a speculative investment. Unlike other assets there is no way to value gold. The price of gold is down 15% from the peak, is it attractive to buy now? No one knows. One can only speculate. Will gold be able to deliver 7-8% of more over a 5-8 year period? No one can predict, it may even go down in value.

There are many complex and global factors that affect the price of gold. Many buy gold because they consider gold as a safe haven or an inflation hedge. But these are all myths as they are not supported by long-term historical facts.

If you have an investment horizon of 5-8 years then you can consider investing in a portfolio of quality stocks or equity mutual funds. The share price of good quality companies will go up on earnings.

Will this scheme attract investors?

The first gold ETF was launch in 2007 by Benchmark Mutual Fund. Eight years later and we have 13 schemes in existence. However, gold ETFs which were much n demand some years back have now turned unattractive. In an earlier article we pointed out that the assets under management of gold exchange traded funds (ETFs) which peaked to Rs12,057 crore in January 2013 declined 51% to Rs5,957 crore as on 31 July 2015. As much as Rs4,200 crore was pulled out of gold ETFs by investors over this period. The number of gold ETF folios fell by 26% to 449,015 as on 31 October 2015, from 605,881 as on 31 May 2013.

Gold is often considered a safe haven and is expected to beat inflation. However, the volatile price movements over the past few years would have come as a shock to investors. Based on above data it seems that investors seem to be dumping gold ETFs for other alternatives. While gold bonds scheme will give investors an additional return of 2.75%, investors will be more concerned about the price volatility.

About the scheme-

Application Dates: Issue of bonds will be accepted between 5^th and 20^th November. Gold bond issue will be on 26th November through banks, notified post offices.

Bond denominations: The gold bonds will be denominated in multiples of gram(s) of gold with a basic unit of one gram.

Minimum Purchase Value: Two grams or Rs5,500 approximately, based on the current price of gold

Maximum Purchase Value: 500 gram per financial year or Rs13.75 lakh approximately, based on the current price of gold  

Bond Price: The issue and redemption price will be in Indian rupees fixed on the basis of the previous week's (Monday-Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association

Rate of interest: 2.75% per annum payable semi-annually on the initial value of investment

Liquidity: The bond tenure will be of eight years with exit option beginning the fifth year onwards. The bonds will be tradeable in the secondary market.

Tax: Interest on gold bonds will be taxable as per the provision of Income Tax Act, 1961. The capital gains tax shall also remain same as in the case of physical gold.

Costs: Commission for distribution shall be paid at the rate of one percent of the subscription amount.