All about Sovereign Gold Bonds:
India is the second-largest consumer of gold after China and the largest importer of Gold. Do you know that India imports around 800-900 tonnes of Gold annually? And in monetary terms, it could be at an average of INR 2trillion! Whoa, that’s huge, isn’t it? India’s Gold demand has seen a huge dip in the first quarter, due to the obvious reasons of lockdown and ban on air travel. Continue reading to know more about Sovereign Gold Bonds.
What are the options available for investors, where the underlying asset is Gold?
1. Physical Gold:
While the easiest way of buying Gold is Physical Gold, but that is not a very prudent way of investment, now that there are better options. The money that you invest in physical gold, does not contribute to any economic growth, unlike investment in shares, bonds, and various other deposits. Along with it, there is always an underlying concern about the safety of physical Gold.
2. Gold ETF’s (E.g. GoldBees):
Since the prices of Gold are not much volatile and do not depend on the stock market, hence Gold ETF’s have some advantages over Physical Gold. Gold ETFs are open-ended Exchange-traded funds, which can be traded (bought and sold) on stock exchanges. The money invested is as per the prevailing Gold Price, hence purity is never a concern here. But since in GOLD ETFs, physical Gold is purchased and stored safely by the investment house, hence the expense ratio is quite huge (which is charged from the investor), which impacts the returns directly.
3. Sovereign Gold Bonds (SGB):
This is a comparatively new instrument, which was launched by the Government of India in 2015. These bonds are issued by RBI, on behalf of the Government of India. Here you simply buy the bond from RBI, and there is no buying of physical gold. It has added returns and is a very safe instrument, hence considered to be the best when it comes to investing in Gold.
Why have Sovereign Gold bonds been introduced?
India’s Gold demand is very high. Since most of the precious metal is imported, it increases the fiscal deficit of the government and affects forex reserves. Hence Sovereign Gold bonds is a wonderful way to possess gold, without actually possessing physical gold. This can, in turn, help the government balance its import-export ratio.
What are Sovereign Gold bonds?
As shared above, SGBs, are issued by RBI and they behave just like Gold. The value of these bonds is exactly according to the value of physical Gold. These securities are issued even in the multiples of 1gm gold, hence it makes it very easier for small investors, to invest in Gold. These bonds are traded on stock exchanges, for which you must have a Demat account.
But SGBs are long term investment, as this bond has a tenor of 8years, though after 5 years you can redeem the bond (after every 6 months).
Benefits of Sovereign Gold bonds:
When it comes to investing in Gold, SGB, offers a wonderful option, due to its features:
- Extra Returns: The government pays 2.5% assured interest per annum on the issue price. This interest is over and above the price of the gold that you will be getting at the end of your maturity period. This interest is paid semi-annually. This Long term investment with an additional 2.5% return is quite a decent return if you are looking to invest in Gold.
- Backed by Government of India: Since it is backed directly by GOI, hence it is a kind of risk-free and guaranteed return instrument.
- Safety and Storage: Since these bonds are held in electronic format and there is no physical buying of Gold here, hence this instrument is safe and carries no theft risk.
- No purity concerns: When you buy physical Gold in the form of jewelry and keep it as an investment, you lose a certain amount on purity. Usually, 22Kt Gold is used to make jewelry. And in Gold bonds, the price paid to the investor is equivalent to 24Kt gold. Thus there is no wastage of Gold in the form of these bonds.
- Tax benefits of Sovereign Gold bonds: If you hold SGB till maturity, you are exempted from the Capital gains tax. Interest income will be taxed as per your IT slab. Further, in Physical Gold, there is a 1% wealth tax charged, if you possess gold valued more than 30lakhs.
- Reselling: Since SGBs are traded on stock exchanges, hence buying and selling becomes easier. While in Physical Gold, you need to approach the jewelers to resell the gold, and a certain % is always deducted, basis the purity of gold, which comes as a loss to the investor.
- Collateral for taking a loan: Unlike Gold EFT’s, you can use SGBs as collateral for taking loans.
Related Read: How can Gold Loans help during the Financial crisis?
When are the Sovereign Gold bonds issued?
For the FY20-21, Sovereign Gold Bonds will be issued in 6 tranches, from April 2020 to September 2020. While the recent last subscription date was 10th July, the upcoming subscription days are from August 03-August 07, 2020. Do keep a check on the RBI press releases, which are announced usually 2-3 days before the start of the SGBs subscription date.
The value of Gold Bonds is ascertained on the basis of a simple average of the closing price of gold (999 purity), as published by the India Bullion and Jewelers Association Limited. This average is calculated for the last 3 business days of the week just before the subscription period.
*Except NRI’s and companies, any individual can buy SGBs. Readout some FAQ’s on SGBs on RBI website
Physical Gold vs ETF vs Sovereign Gold Bonds?
When compared directly, SGBs will turn out to be the best performer as it offers 2.5% extra over the price of the pure Gold. In the nutshell, you should invest in SGBs, only if you are planning to buy physical Gold or Gold ETFs. This investment can be a great way to hedge your portfolio and diversify your investments.
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These are solely the opinions of the author. Though the information is well researched and true to the best of author’s knowledge, it cannot be a substitute for professional advice. This post does not guarantee or promises regarding the accuracy, reliability, or completeness of the information presented. The information presented is only for informational purposes and shouldn’t be seen as any kind of advice. Always refer to your Financial Advisor for financial advice.