Mr. Prathamesh Mallya, DVP Research, Non-Agro Commodities & Currency, Angel One Ltd.
What are these bonds and key features?
Sovereign gold Bonds are one of the ways of digital investment in gold. These bonds are issued by the Reserve Bank of India on behalf of the Government of India. These bonds are denominated in multiples of grams of gold with a basic unit of 1 gram
The tenor of the bond will be for the period of 8 years with exit option in 5th, 6th,7th year to be exercised on the interest payment dates. Minimum permissible limit will be 1 gram of gold and maximum permissible limit shall be 4 KG for individuals, 4 Kg for HUF and 20 Kg for trusts and similar entities per fiscal year (April-March) notified by the Government from time to time.
The redemption price will be in Indian Rupees based on the simple average of closing price of gold of 999 purity of previous 3 working days published by IBJA. The investors will be compensated at a fixed rate of 2.50 per cent per annum payable semi-annually on the nominal value. Bonds will be tradable on stock exchanges within a fortnight of the issuance on a date as notified by the RBI.
Why SGB’s are better bet in comparison to physical gold?
Investing in gold is much easier and more convenient now. Sovereign Gold Bonds (SGBs) are the perfect alternative to investment in physical gold. With these bonds, you can enjoy capital appreciation and also earn interest every year. These bonds, issued by the Government of India, also eliminate several risks associated with physical gold.
Unlike physical gold which does not provide any interest, SGB provides interest to the investor at the rate of 2.5% per annum and the last interest will be credited to the investor along with the principal amount. Also, these bonds carry sovereign guarantee on redemption amount and on the interest as well.
Price of Bond will be fixed in Indian Rupees on the basis of simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Limited for the last 3 business days of the week preceding the subscription period. The issue price of the Gold Bonds will be ₹ 50 per gram less for those who subscribe online and pay through digital mode. SGB’s are not taxable if held till maturity
Opportunities for investors
The price of gold has increased in recent years as is visible in the gold price in the international as well as domestic markets in the chart above. The Sovereign gold Bonds are suitable for those investors who don’t want to burden themselves with physical gold and storage issues.
Moreover, it is suitable for a longer-term perspective. Hence, our advice to investors is to take advantage of these digital opportunities of investments in gold. Ideally, one must allocate 10-15% of their portfolio towards investments in gold to systematically balance the overall returns. Since gold has always given good returns over a long term, investors should diversify their portfolio into gold as an alternative value proposition.