CIRCUIT BREAKER. The name’s bond, Gold Bond

Can you think of an investment with a sovereign guarantee that can earn you a 20 per cent return, exempts your capital gains from tax, pays (nominal) interest and is also listed on the exchanges?

Bet you didn’t think of the Government of India’s Sovereign Gold Bonds.

Yes, this is exactly what these bonds have already delivered to investors who were lucky enough to acquire the first tranche.

The bonds, which were issued at ₹2,684 a gram in November 2015, today change hands at ₹3,218 on the exchanges, a return of 20 per cent in the last eight months. The only problem is that hardly anyone seems to be aware of them as an investment option.

Dreamed up by the Modi government as an instrument to wean Indian households away from their jewellery fetish, the fourth tranche of the Sovereign Gold Bond scheme is presently open to the public. The five-day offer is set to close today.

The first three tranches of these bonds have come and gone without making waves among retail investors. In all, the three offers from November 2015 to March 2016 have received just 4.4 lakh applications for bonds worth ₹1,320 crore. This suggests that the bonds have failed to make any material inroads into the booming market for bullion.

While the cumulative demand for Sovereign Gold Bonds adds up to less than 5 tonnes of gold, Indian buyers lap up an estimated 850-900 tonnes of gold in jewellery, bar and coin forms every year.

This is really hard to fathom, because, except for shoppers who buy ornamental gold that they actually plan to wear, the Sovereign Gold Bond makes better sense for every other kind of gold buyer.

For those accumulating gold for a wedding in the far future, this bond scores over jewellery on many counts.

One, you needn’t worry about purity because the bonds are denominated in gold of 99.9 per cent purity.

Two, you can be assured of a fair price because the issue price for each tranche is decided by the Reserve Bank of India, based on official rates from the bullion association. The bonds will also be redeemed at official market prices and you need not suffer arbitrary deductions for wastage and losses.

Three, you need not worry about theft or shell out hefty locker charges, as the bonds can be held in electronic certificate or demat form. Four, you need not resign yourself to losses if you seek liquidity, either. Though these bonds come with an 8-year term, they can be sold prematurely from the fifth year onwards, or used as collateral for loans. They are listed on the stock exchanges for secondary exit too.

These bonds offer a pretty good alternative to investors in gold exchange traded funds (ETFs) as they offer an annual interest payment of 2.75 per cent, while ETFs charge you a management fee.

To top it all off, Sovereign Gold Bonds are exempt from capital gains tax if you sell them at maturity, while every other form of gold investment suffers this tax.

But if Sovereign Gold Bonds are such a hot idea, why have households been so cool to them?

Both, the lack of investor awareness and access issues seem to be holding back retail response to the offers.

Here are three specific fixes that the Centre must consider to have investors sit up and take notice of these bonds.

Savvy advertising : Eggy yellow sarkari ads for Sovereign Gold Bonds are splashed all across newspapers and hoardings. But missing in these ads are the one key element that will get investors to pay attention — returns.

With the ads merely mentioning the ‘fixed interest of 2.75 per cent’, most savers are wont to dismiss the bonds as earning less than a savings bank account.

But as the 20 per cent price appreciation from the first tranche of bonds shows, the larger lure for investors is the prospect of capital gains if gold prices shoot through the roof over the next 5 to 8 years. Highlighting the returns on the first tranche (with due disclaimers on past performance) may drive home the point that the 2.75 per cent interest is only the icing on the cake. The cake is gold price appreciation.

Even if gold prices don’t do an encore, many traditional jewellery buyers may not mind. After all, the bulk of buyers who enrol into the ‘chit’ schemes of jewellers target only a certain grammage of gold over time, and not price gains.

On-tap availability : Indian gold buyers get a thrill out of timing their purchases by keeping an eagle eye on daily gold rates and jumping in to buy on dips.

But the Sovereign Gold Bond deprives buyers of this thrill because it is offered for limited periods of less than a week and are at a dated gold price.

Many savers complain that the last few tranches of bond issues have come and gone even before they could scrounge up the cash to buy them. Making these bonds available on tap, like small savings schemes, and pricing based on prevailing gold rates may help up the interest quotient.

If the worry is that the RBI will get swamped with too much demand for gold bonds and will end up having to import too much gold to back them, the problem is easily solved by capping the purchases per investor, à la small savings schemes.

Wider distribution : Unlike PSU share sales which need to be marketed only to the tiny constituency of equity investors, Sovereign Gold Bonds need to reach out to the vast Indian middle-class which has a penchant for gold. It is, therefore, necessary to think beyond conventional distribution channels.

The initial tranches of gold bonds were sold only through banks and designated post offices. Stock exchanges have recently been added to this list. But these intermediaries are unlikely to be enthusiastic marketers.

Brokers are likely to be loath to move investors away from the high-transaction equities to passive gold bonds. Banks are hardly likely to push products that can lure away their precious CASA (current accounts savings accounts) and dent demand for their pricey lockers.

In this situation, India Post, with its network of over 1.5 lakh branches reaching deep into Bharat, offers the best distribution bet for these bonds.

Incentivising postal staff to inform and educate small savers about these bonds may work wonders in generating mass appeal for this excellent investment avenue.