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In our previous article related to Gold ETFs, we discussed how Gold ETFs are a better form of investment than physical gold. Here we will discuss the features & working of another way of gold investment through Sovereign Gold Bonds (SGBs).

Sovereign gold bonds are issued by the Reserve Bank of India (RBI) on behalf of the government. Since these are Government of India bonds, they have a sovereign guarantee. The sovereign gold bond scheme was launched in 2015 with an objective to reduce the demand for physical gold and shift a part of the domestic savings into financial savings. The features of SGB are as follows:

  • The price of the sovereign gold bonds is calculated by doing the simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewelers Association Limited. The average closing price of the last three business days of the week preceding the subscription period is taken to calculate the subscription price of the gold bonds.

  • One unit of gold bond is equal to one gram of gold. One has to buy a minimum of 1 unit of gold bond and one can buy maximum units equivalent to 4 kg of gold or 4,000 units in a financial year.

  • The Sovereign Gold Bonds are available both in DEMAT and paper form.

  • Bonds become tradeable on stock exchanges within a fortnight of the issuance on a date, and thus provides liquidity.

  • Gold bonds offer an annual interest rate of 2.50% to investors. The interest is paid semi-annually to the investor and is fully taxable in the hands of the investors.

  • Gold bonds have a maturity period of eight years but investors will have the option to exit after the fifth year.

  • Capital gains, if any, at maturity is tax-free. This is an exclusive benefit available on gold bonds. However, since SGB is related to the market price of gold, the risk of capital loss may be there when the market rate of gold goes down, but it does not affect an investor’s units of gold.

  • Investors buy in cash, but the bonds will be redeemed in cash upon maturity. However, the bonds can be purchased during some specific times available.

  • Further, there is no transaction cost related to exit from the SGB scheme (provided the exit is not through the secondary market).

  • Sovereign Gold Bonds securities are eligible to use as collateral for loans from banks, financial Institutions, and Non-Banking Financial Companies (NBFC).

  • Experts believe one should invest in sovereign gold bonds for the long-term to reap the maximum benefit.

How much does it cost to invest in a sovereign gold bond scheme?

The initial cost of owning physical gold can be as high as 25 %. In the case of Sovereign Gold Bonds, there are no entry charges and even the fund management cost is not there. The issuing agency which pays distribution costs and a sales commission to the intermediate channels is reimbursed by Government.

Why should an investor invest in a sovereign gold bond scheme?

The correlation of gold prices with the stock prices is very low (at around 0.25) and, therefore, investments in gold acts as an excellent diversifier to the existing portfolio. Investments in gold can be used to reduce the volatility of the overall portfolio. Therefore, it is advisable to invest in gold bonds to take advantage of such appreciation coupled with the interest income.

How to invest in SGBs and redeem SGBs?

Investors can apply for the bonds through scheduled commercial banks and designated post offices. NBFCs, National Saving Certificate (NSC) agents, and others can act as agents. They would be authorized to collect the application form and submit in banks and post offices. BSE and NSE are included as receiving offices, apart from the commercial banks, SHCIL, designated post offices.

On maturity, the redemption is made in rupee amount only. The rate of interest on the bonds is calculated on the value of the gold at the time of investment. The principal amount of investment, which is denominated in grams of gold, can be redeemed at the price of gold at that time. If the price of gold has fallen from the time that the investment was made, or for any other reason, the depositor is given an option to roll over the bond for three or more years.

To conclude, gold is the best-performing asset class this year, as equities have seen a huge correction due to the coronavirus pandemic. Thus, SGB investors can gain from the appreciation in prices of the precious metal and also earn interest at the rate of 2.5% on the initial investment amount during the entire tenure.


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