WHAT IS SOVEREIGN GOLD BOND
Gold has been a favored investment in India for centuries, revered for its cultural significance and perceived store of value. In recent times, there have been several avenues to invest in gold, catering to the diverse preferences and financial goals of investors. Gold has held a special place in the hearts and minds of Indians for centuries. It’s not just a precious metal; it’s a cultural icon, an auspicious symbol, and a symbol of wealth and security. In India, the appeal of gold as an investment goes far beyond its financial potential. It’s a fact that from the start of civilization more than 200,000 tons of gold has been extracted. Out of that around 50% is distributed in form of jewelry instruments, 20% is there in form of coins, Gold ETF & Mutual funds, 18% is with Central Banks and rest of the residual amount is used (being used) in Real world applications. In this blog, “What is Sovereign Gold Bond”, we will explore in detail about one of the best forms of Gold investment and its comparison with other forms available in India.
Importance of gold in Indian culture and investments:
Below mentioned are some off the benefits why one should consider Gold:
Cultural Significance: In India, gold is more than just an investment; it is deeply intertwined with the culture and traditions of the country. Gold jewelry is a common component of weddings and festivals, symbolizing prosperity and good fortune.
Wealth Preservation: Gold has historically proven to be a reliable store of value, protecting against inflation and economic uncertainties. During times of currency devaluation or economic instability, gold often retains or increases its value, making it a reliable hedge against financial crises.
Diversification: Gold, with its low correlation to other assets like stocks and bonds, serves as an effective diversification tool. When other investments falter, gold tends to perform well, balancing your portfolio and reducing overall risk.
Liquidity: Investing in gold in India is highly liquid. Gold jewelry can be quickly sold, and there is a well-established market for buying and selling gold. Additionally, financial products like Gold Exchange-Traded Funds (ETFs) and Sovereign Gold Bonds (SGBs) make it easy to trade gold on stock exchanges.
Capital Appreciation: Over the long term, gold has displayed a consistent trend of capital appreciation. While short-term price fluctuations are common, gold has demonstrated a steady growth in value. Investors in gold can benefit from price appreciation, especially in times of economic uncertainty or market volatility.
Tax Benefits: Sovereign Gold Bonds (SGBs) provide additional tax benefits for investors. Interest income from SGBs is exempt from income tax, and capital gains tax is also not applicable when the bonds are redeemed. This tax advantage can significantly enhance the returns on your gold investment.
Investment Options: India offers a wide range of investment options for those interested in gold. Investors can choose from physical gold, digital gold, Gold ETFs, Gold Mutual Funds, and Sovereign Gold Bonds, allowing for flexibility in terms of investment size, risk, and liquidity preferences.
Definition of Sovereign Gold Bond (SGB)
Sovereign Gold Bonds (SGBs) are a kind of financial instruments issued by the Government of India (RBI), for individuals to invest in gold without physically owning the metal. These bonds are denominated in grams of gold, and investors can buy them in multiples of the prescribed unit.
A. Key features of Sovereign Gold Bonds
Interest Rate: SGBs offer a fixed annual interest rate on the initial investment. This interest is credited half-yearly to the investor’s bank account.
Tenure: The bonds have a maturity period of eight years, but investors have the option to exit after the fifth year on specific interest payment dates.
Redemption: At the end of the maturity period, the investor receives the face value of the bond, which is based on the prevailing market price of gold.
Tax Benefits: The capital gains tax arising on redemption of SGB to an individual has been exempted. Also, indexation benefits are provided to long-term capital gains tax, if the bonds are transferred before maturity.
Tradability: SGBs are tradable on stock exchanges, providing liquidity to investors who may want to exit their investments before maturity.
Eligibility: Individuals, HUFs, trusts, universities, and charitable institutions are eligible to invest in Sovereign Gold Bonds.
Denomination: The bonds are issued in denominations of grams of gold, allowing investors to choose the quantity they want to invest in.
Sovereign Gold Bonds aim to encourage people to invest in financial instruments linked to gold rather than physical gold, thus reducing the demand for imported gold and helping in the stabilization of the country’s economy.
Understanding Sovereign Gold Bond:
Sovereign Gold Bonds (SGBs) are financial instruments issued by the Government of a country, allowing investors to invest in gold in a paperless and secure manner. Unlike physical gold, SGBs are in the form of bonds denominated in grams of gold. Investors subscribe to these bonds, and the government guarantees the redemption amount at the time of maturity, which is usually eight years.
A. Purpose:
The primary purpose of Sovereign Gold Bonds is to mobilize the idle gold held by individuals and institutions in the country. By providing an alternative investment avenue, the government aims to reduce the reliance on physical gold imports, which can have a positive impact on the trade balance. Additionally, SGBs offer investors an opportunity to earn returns linked to the market price of gold, along with a fixed interest rate.
Sovereign Gold Bonds are considered a prudent investment for individuals looking to diversify their portfolio and gain exposure to gold without the concerns associated with holding physical gold. These bonds also align with the government’s broader objectives of promoting financial inclusion and discouraging the hoarding of unproductive assets. Overall, Sovereign Gold Bonds serve as an innovative financial instrument that combines the benefits of gold investment with the security and interest-earning potential of government-backed bonds.
B. Issuer:
Government of India: The issuer of Sovereign Gold Bonds (SGB) is the Government of a sovereign nation, typically India. These bonds are financial instruments backed by the government and are specifically designed to enable individuals to invest in gold in a more structured and paperless manner. These Sovereign Gold Bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
Investors can purchase these bonds in denominations of gold, and the bonds are linked to the market price of gold. The issuer guarantees the redemption of the bonds at the prevailing market price at the time of maturity. Sovereign Gold Bonds are an attractive investment option for those who want to benefit from the appreciation in the price of gold while also earning interest on their investment.
The Government issues these bonds with the aim of mobilizing the idle gold held by individuals and channeling it into productive sectors of the economy. Sovereign Gold Bonds offer a convenient and secure alternative to physical gold, as they eliminate the need for storage and are traded on stock exchanges, providing liquidity to investors.
C. Features and characteristics
- Tenure: The bonds have a maturity period of eight years, but investors have the option to exit after the fifth year on specific interest payment dates.
- Interest rate: SGBs offer a fixed annual interest rate on the initial investment. The interest is credited half-yearly to the investor’s bank account.
- Denomination: The bonds are issued in denominations of grams of gold, allowing investors to choose the quantity they want to invest in.
- Liquidity: Sovereign gold bonds come with a maturity period of 8 years. However, in case you want to redeem before maturity, you have further 2 options.
You can prematurely redeem the bonds after 5 years, i.e., after completion of their lock-in period. In case you want to retrieve your investment before completion of initial 5-year period, you can do it by listing and selling your sovereign gold bond in secondary market. This can be done after the completion of 6 months from the date of issue.
Advantages of Investing in Sovereign Gold Bonds
- Interest income: Sovereign Gold Bonds provide investors with an additional advantage through the interest income they accrue. The government pays a fixed annual interest rate on the initial investment, providing an extra source of income for investors. This feature sets SGBs apart from physical gold, which does not generate any income by itself.
- Capital appreciation: Apart from the interest income, investors benefit from the potential capital appreciation of the underlying asset – gold. As the price of gold tends to appreciate over the long term, investors stand to gain from the increase in the market value of the gold held in the bonds. This dual advantage of interest income and potential capital appreciation enhances the overall return on investment.
- Safety and security: One of the primary advantages of investing in Sovereign Gold Bonds is the safety and security they offer. Being issued by the government, SGBs eliminate the risk associated with the physical storage and safety concerns often associated with owning physical gold. Investors can enjoy the benefits of gold ownership without the need for secure storage facilities, making it a hassle-free investment.
- Tax benefits: Sovereign Gold Bonds come with certain tax benefits, making them an attractive investment option. The interest income earned is exempt from Goods and Services Tax (GST), and if held until maturity, the capital gains arising from redemption are also exempt from capital gains tax. This tax efficiency adds to the overall attractiveness of SGBs in comparison to other forms of gold investment.
How to Invest in Sovereign Gold Bonds:
- Eligibility criteria: Individuals, HUFs (Hindu Undivided Families), trusts, and universities are eligible to invest in Sovereign Gold Bonds. The bonds can be held in the individual capacity or jointly.
- Subscription process: Investors can apply for SGBs through scheduled commercial banks, designated post offices, and recognized stock exchanges. The application process is online, making it convenient for investors to subscribe.
- Redemption process: The maturity period for Sovereign Gold Bonds is typically eight years, with an exit option after the fifth year. Investors can also choose to exit on the interest payment dates. At maturity, the redemption is done at the prevailing market price.
Risks and Considerations
- Market risks: The market price of SGBs can be subject to fluctuations based on various factors such as changes in the international gold prices and general market conditions. Investors should be prepared for the possibility of capital losses if they need to sell their bonds before maturity. Unlike physical gold, the value of SGBs can be influenced by market sentiment and economic conditions.
- Lock-in period: Although SGBs have a tenor of eight years, investors have the option to exit after the fifth year on interest payment dates. Exiting before the completion of five years is subject to certain conditions and may result in a capital gains tax. The lock-in period can limit the flexibility of investors who may need access to their funds before the end of the fifth year.
- Interest rate fluctuations: SGBs come with a fixed annual interest rate, typically paid semi-annually. The interest is taxable, and changes in interest rates in the broader economy can impact the attractiveness of these bonds. If interest rates rise significantly, the fixed interest offered by SGBs may become less attractive compared to other fixed-income instruments.
Below is a detailed video attached for the ease of understanding and clarification of doubts (if any):
Comparison with Other Forms of Gold Investments
Below is the comparison of Sovereign Gold Bond with other Forms of Gold Investment:
Physical Gold:
SGBs: They are in dematerialized form, eliminating the need for storage and security concerns associated with physical gold.
Physical Gold: Involves the purchase of gold coins, bars, or jewelry, which require safe storage and may incur additional costs for security.
Gold ETFs (Exchange-Traded Funds):
SGBs: Offer interest (coupon) in addition to capital appreciation, providing a dual benefit.
Gold ETFs: Generally, track the gold price but do not provide an additional interest component.
Gold Mutual Funds:
SGBs: Issued by the government, considered relatively low-risk, and provide a fixed interest rate.
Gold Mutual Funds: Managed by fund managers, returns depend on the fund’s performance, and they may involve higher risk compared to SGBs.
Jewelry and Ornaments:
SGBs: Easy to buy and sell on the stock exchange, providing liquidity.
Jewelry and Ornaments: Limited liquidity, and the resale value may be influenced by craftsmanship and design rather than just the gold content.
Gold Saving Schemes:
SGBs: Transparent pricing based on the prevailing market rates.
Gold Saving Schemes: May involve making regular payments at a fixed gold price, with the final returns subject to market rates at the time of maturity.
Fixed Deposit with Gold Option:
SGBs: Tradable on stock exchanges, offering liquidity before maturity.
Fixed Deposit with Gold Option: Generally, a fixed tenure with limited liquidity options before maturity.
Gold Mining Stocks:
SGBs: Directly linked to the price of gold, providing a hedge against inflation.
Gold Mining Stocks: Affected by company-specific factors and market conditions, potentially involving higher volatility.
Digital Gold:
SGBs: Issued by the government, providing a sense of security.
Digital Gold: Allows small investments in gold but might lack the government-backed assurance.
Frequently Asked Questions (FAQs)
- What is the risk of sovereign gold bond?
- Government support makes sovereign gold bonds safest forms of investments in Gold, available in India, as chances of defaults on repayment is almost zero. Any risk associated with this investment is attributed to market fluctuations which can cause volatility in gold prices.
- What is the current issue of sovereign gold bond?
- Sovereign Gold Bond Scheme 2023-24 Series 2
- Date of subscription of SGB: September 11, 2023 – September 15, 2023
- Date of SGB 2023-24 issue: September 20, 2023
- Price: ₹ 5,923/- For investing online: ₹ 5,873/-
- Tranche: 2023-24 Series II
- Is SGB better than FD?
- In comparison to fixed deposits, which involve a lock-in period, SGBs offer high liquidity. They can be traded in secondary market, providing investors with an opportunity to potentially earn better returns and a flexibility to exit their investment at any time before maturity.
- How many times SGB is issued in a year?
- The issuance of gold bonds is usually announced through a press release from the Government every 2 or 3 months with a window of one week when investors can subscribe to these schemes. Sovereign Gold Bonds comes with a maturity period of 8 years, but an investor can choose to exit after completion of 5 years.
- What is the max limit for SGB?
- Minimum permitted investment will be 1 gram of gold. Maximum limit of investment is 4 KG for individual, 4 Kg for HUF and 20 Kg for trusts per financial year (April-March) notified by the Government from time to time.
Conclusion
Sovereign Gold Bonds can be an attractive investment option for those looking to diversify their portfolio and gain exposure to gold. However, like any investment, SGBs come with their own set of risks and considerations. It is imperative for investors to carefully assess their financial goals, risk tolerance, and investment horizon before incorporating SGBs into their portfolio. Seeking advice from financial experts and staying informed about market conditions can help investors navigate the complexities associated with sovereign gold bonds and make sound investment decisions.
Links to official sources
