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BASL Registration Number: 1951 | Non-Individual RIA. Regn No. INA000017620 | Validity Perpetual

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Should you invest in Sovereign Gold Bond Scheme this Diwali?

Updated: Mar 21

The Government has come out with the issuance of the first tranche of sovereign gold bond (SGB) scheme announced in the Union Budget earlier this year. Application for the bonds would be accepted from 5 November to 20 November 2015. The bonds would be issued on 26th November. SGBs would be available only for Resident Indians.

Key highlights of the scheme:

  1. The gold bonds can be held either in paper form or demat form. Each bond unit is equivalent to 1 gram of gold.

  2. The Government has fixed the minimum investment in bonds at 2 grams and the maximum investment is capped at 500 grams per investor per fiscal year. Presently, the issue price for the first tranche of bonds is been fixed at Rs.2,684 per gram of gold. This translates into a minimum investment of Rs.5,368 and a maximum investment of Rs.13.4 lakhs.

  3. The tenure of the gold bond is 8 years. There is a lock-in period of 5 years and one can exit/surrender after that. The gold bonds would be listed and tradable on the stock exchanges. So anyone who wishes to exit before 5 years can redeem on the stock exchange in the secondary bond market. Anyone who wishes to stay invested can further extend for a period of 3 years after maturity.

  4. Income from investment in SGBs will be in the form of fixed interest and capital gains. SGBs will earn a fixed interest of 2.75 per cent per annum. It will be simple interest and will be paid half yearly on the initial investment. Capital gains will accrue if there is a positive difference between the issue price and the redemption price.

  5. SGBs carry sovereign guarantee. So there is no risk of default. But they carry price risk. The value of your investment would increase with the rise in gold prices and vice versa. Bonds have to be redeemed in cash on date of maturity at the then prevailing price of gold.

  6. The interest income on SGBs will be taxable. Further, the capital gains would also be subject to taxation as per the holding period. If bonds are sold before 3 years, short term gains would accrue and taxed as per slab rate. If bonds are sold after 3 years or more, capital gains would be considered long term and taxed at 20 per cent with indexation benefit.

Good and bad points of SGB:

SGBs like gold ETFs are available in demat and paper form, so no need to bother about storing in a locker. You also need not worry about cheating or impurities in gold bond. You will always get 100 per cent of the value on redemption. The main point where SGBs score over gold ETF is the interest income even though it is taxable. An investor does not earn any interest while buying physical gold or gold ETFs. Further, ETFs carry an expense ratio which is not there in SGBs.

Liquidity however is an issue in SGBs with an investment lock-in of 5 years. Even if one wishes to exit before 5 years in the secondary bond market, it would not be easy because practically, there is no big trade market for such bonds. Further, you have to invest a lumpsum amount in SGBs at the stipulated price fixed by the government. So if tomorrow, gold prices fall below the issue price of Rs.2,684, you will not be able to benefit from it unlike in the case of ETFs where you can start an SIP and average out the cost.

Should you go for SGBs?

The objective of any investment has to be very clear and mapped to a goal. If you are planning your child’s marriage few years down the line, you need not invest in gold funds or gold bonds to accumulate gold. There are better options like equity mutual funds which would give you better returns over long term which you can utilise later to buy gold. You can also buy physical gold at periodic dips.

You can invest in SGBs if you want to diversify your portfolio. We at VSK have always advocated the importance of asset allocation & portfolio diversification considering that different asset classes behave in a different manner in economic situations. Gold should have a maximum 10 per cent exposure in your portfolio to provide hedge against any economic turmoil. However, if gold is already exceeding 10 per cent of your portfolio, then you can avoid SGBs.

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