Gold bonds are an interesting new option | Value Research While gold can never be recommended as an investment, the new government gold bonds are an interesting option who can't resist it
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Gold bonds are an interesting new option

While gold can never be recommended as an investment, the new government gold bonds are an interesting option who can't resist it

The Government of India is now seriously in the business of storing and management your gold, plus providing a gold investment services to you. Almost all the details of the
new set of gold-related government schemes are now in place.

If you want to buy gold for investment, or if you already have gold that is essentially an investment, the Government of India has a deal for you. It's a deal that is designed to let you get the core benefit of investing in gold, plus a little more. And for the government, it will reduce the amount of gold that will have to be imported into the country.

The gold bond scheme is specially interesting. In fact, the first thing that occurs to me is that once this scheme is operational, there is very little reason for gold mutual funds to exist. There are those who like to own physical gold and those who are happy with paper gold because they just want the returns. Up till now, for investors in non-physical gold, gold funds were the most logical and hassle-free choice. Now, the new government bonds are a better option. These bonds will track the price of gold, plus an extra interest earning on top of that.

The bonds are denominated in grams of gold, and will be available in a variety of amounts starting from 5 grams. The investment is simple to understand. Instead of buying 10 grams of gold as investment, you buy a 10 gram gold bond, which will be available from banks, post offices and other places. The minimum tenure of the bond is not yet set, but is likely to be five years. After five years, you redeem the bond and get whatever is the value of 10 grams of gold. The difference is that you will also get an additional interest amount, over and above the gold value. Moreover, as the official release is careful to point out the the 'Department of Revenue has agreed' to amend the Income Tax Act so that buying and selling these bonds will have exactly the same tax treatment as physical gold.

How do these bonds compare to physical gold, and to gold funds. Well, let's keep aside those who buy and store gold out of black money because that's a separate story. For those who will invest in gold out of legitimate funds, and do not need to feel the stuff in their hands or hang it around their necks, the bonds make more sense. Firstly, they will earn an extra buck in the form of interest and secondly, there will be no problem of purity, or of physical security.

As far as the comparison to gold mutual funds go, the bonds will generate higher returns. While gold funds also track gold prices just like these bonds will, they have fund management charges out of which the fund company pays its expenses and makes it profit. Since the government gold bond will not charge that, as well as it pay an extra interest, gold mutual funds just can't compete on returns. What they can compete on is liquidity. The bonds will have a frozen tenure, probably of five and seven years, while gold funds are redeemable at three days notice at any point. Perhaps there will be a secondary market for selling these bonds, but that's a big perhaps. The minimum ticket size for the bonds is also rather large at 5 grams equivalent. That's about ₹13,000 right now and will go up as prices rise, but for most gold funds, this is ₹5,000.

However, for those who are investing for a period as long as a few years, the higher returns of the government bonds are a clear win.

Will the scheme be a success? That depends entirely on the definition of success. The goal of the scheme is to reduce gold imports. Clearly, this is not going to reduce gold imports by 50 or 25 per cent or anything like that. Instead, it should be seen as a long-term measure, which, over the years may change the gold-owning culture in India to a some degree. Whatever be the quantum of its usage, an investment tool like gold bonds should always be available. Of course, gold is not a very useful asset to invest in, but that's a separate story.

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