The recent reduction in gold import duty from 15% to 6% by the government in the latest Union Budget has brought about some uncertainty regarding the future returns from Sovereign Gold Bonds. Investors who purchased these gold-linked government securities fear their anticipated gains may not fully materialize.
The first series of SGBs issued in August 2016 is due for redemption this month. At the time of issue, gold was priced at Rs. 3,119 per gram. Based on current market rates around Rs. 6,853 per gram, bondholders were expecting well over 100% appreciation in value apart from annual interestreceived. However, the fall in domestic gold prices following the duty cut could impact final proceeds.
The redemption price of SGBs is determined by average gold prices in the week before maturity. After the budget announcement, gold dropped around 5% on commodity exchanges. Lower prices directly influence the amount SGB owners receive back. Those who invested in Series II bonds redeemed in March benefited from 126% capital appreciation plus interest over 8 years. Futureseries may see comparatively lower returns due to change in duty.
While SGBs remain an attractive investment due to sovereign backing, assured returns and tax benefits on redemption, market experts feel the reduction in import levy will impact gold asset class returns across the board, including physical holdings and exchange-traded funds. Lower import costs are likely to spur local demand in the coming festival season, which could support price recovery over the medium term. Overall, SGBs continue providing a stable investment avenue for risk-averse investors seeking gold exposure.
