Gold bondholders winners even after slash in duty

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₹3,119 per gram while the current rate of 24-carat gold is ₹6,818 per gram, a gain over two times on investment , or 10.3% compounded annual growth rate, as per Reserve Bank of India (RBI) and India Bullion & Jewellers Association (IBJA) rates. To give context, the Nifty has compounded by 13.8% over the same period, making gold a "reasonably good portfolio diversifier, along with the interest on the issue price," according to Amol Joshi, founder, PlanRupee Investment Services, a mutual fund distributor.

Along with capital appreciation the bond earns the holder a simple interest payable semi -annually. While the current rate of interest is 2.5% on issue price, the tranche issued in August 2016 had a coupon of 2.75%.

The RBI uses trade body IBJA's rates to price gold bonds issued on behalf of the Union government. Since Monday the price of 24-carat gold, as per IBJA, has fallen from ₹7,322 (closing rate) per gram to ₹6,818 (opening rate) on Thursday, a fall of 6.88%.

The whole effect of the duty cut -9%—appears to have not been fully captured ahead of the budget as gold in the local market was already trading at a 4-5% discount to the bank rate because of low demand, according to IBJA national secretary Surendra Mehta. However, despite the fall because of the duty cut and international prices correcting with uncertainty abating over the Democratic candidate taking on Donald Trump, bond returns have been impressive.

"SGBs issued earlier have generated over two times returns on issue price and so the duty cut impact on profit would be a marginal 5% or so," said Shekhar Bhandari, president - Global Transaction Banking at Kotak Mahindra Bank. "With the duty cut, consumer demand for bonds and physical gold will increase