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SHINING BRIGHT If you plan to invest for the long term, the Sovereign Gold Bond Scheme may be your best option
 
After a long slump, gold has witnessed an almost 15% rise to `28,595 per 10 gram over the past six months.This may have eased the buying pressure for now, but is a price-rise likely in the near future, creating another buying opportunity?

Internationally , gold prices may fall given the likely increase in interest rates by the US Federal Reserve. In India, however, the prices may rise somewhat if the fundamentals remain intact and the rupee stabilises.

Given Indians' long-standing love for the yellow metal, are they planning to buy? If yes, will they stick to their favourite form, physical gold, or move to gold bonds, the new option in the market that was launched November last?  The prices may not be as bearish as they were in November to create a buying dip, but gold bonds could be the best option by sheer virtue of the interest (2.75%) you would earn in addition to capital appreciation.

An online survey conducted among 934 respondents last week reveals that 48% people are indeed planning to buy gold, but they are not so enthused about picking it up in the form of bonds (only 20%).This despite the fact that nearly 71% of financial planners consider it the best option. With the fourth tranche of the Sovereign Gold Bond scheme to launch after the start of the gold bond trading on the exchange on May 29, we reprise the scheme, list its pros and cons, and tell you whether you should opt for it or not.

HOW DO BONDS COMPARE WITH OTHER OPTIONS?


Bonds score over the other two options, physical gold and gold ETFs or mutual funds, on many fronts.

First, they offer interest income over and above capital appreciation, which is not available with the other options.

 

Second, there are no charges incurred as against the locker, insurance premium or making charges you would pay for jewellery , or the expense ratio for ETFs.

Third, there are no concerns over security or purity since the bonds are held in the demat form and the price is based on gold with 0.999 purity . Besides, bonds are not subject to capital gains tax if held till redemption, with only the interest portion taxable as of now. On the other hand, both gold ETFs and physical gold are subject to capital gains tax.

On the flip side, liquidity is an issue. It's a major concern as the exit option is available only after five years, unless you sell the bond on the exchange for which the market is not very active at the mo ment.

WHAT SHOULD YOU DO?


If you are looking at gold purely as an investment, especially for the long term, bonds are the best option. They offer interest along with capital appreciation, and beat other forms of gold on parameters like charges and security. One must remain invested in gold at all times, with 10% of corpus allocated to it.

Besides income, bonds offer peace of mind. Remember, however, that you may remain locked in for five years. And of course, you c a n' t we a r bonds.





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