The government will open the fifth tranche of sovereign gold bonds (SGB) from September 1-9 and the bond will be issued to the subscribers on September 23. The minimum subscription will be one gram of gold and the maximum that an individual or an institution can invest is up to 500 gram for a financial year. The interest rate is fixed at 2.75% per annum, payable every six months on the initial value of the investment.
In the fourth tranche last month, the government raised R919 crore through 1.95 lakh applications representing around 2.95 tonnes of gold. The issue price for the fourth tranche was fixed at R3,119 per unit of gold. The previous highest was R746 crore, which was realised in the second tranche, when the issue price was R2,600 per gram of gold. In all the four tranches together, the government raised R2,237 crore representing around 8 tonnes of gold.
The bonds can be bought by resident Indian entities, including individuals, HUFs, trusts, universities and charitable institutions.
On maturity, the bonds would be redeemable in cash and the principal amount of investment (which is denominated in grams of gold) will be redeemed at the prevailing gold price.
The bonds can be purchased from NSE and BSE besides all bank branches, select post offices and the Stock Holding Corporation of India.
The tenure of the bond will be for eight years with exit options in fifth year to be exercised on the interest payment dates.
The government launched SGB in the Union Budget 2015-16 as an alternative to lower the demand for physical gold. The first tranche was launched in November 2015 to reduce the demand for physical gold and bring down imports.
The bonds are available in both demat and paper form and can be used as collateral for loans. As per the Budget 2016-17, capital gains tax is exempted on redemption. It also said long-term capital gains arising to any person on transfer of sovereign gold bonds will be eligible for indexation benefits.
Gold ended with negative returns in 2015 for the third year in a row. It has been the biggest outperformer among all asset classes this year.
Experts say investment in gold can act as a diversifier and as a vehicle to mitigate losses in times of market stress.
While most Indians prefer to invest in the precious metal in the physical form, gold exchange traded funds (ETFs) are also a convenient way to invest in the precious metal. They are open-ended funds that trade on a stock exchange just like the shares of a company and track closely the price of physical gold.
Each unit of the ETF is equivalent to one gram of gold and it provides an opportunity to investors to accumulate gold over a period of time.
However, gold bonds are a better way to invest in the metal as the investment will earn an interest. This unique product gives a financial product-like return, tagged with the appreciation of gold.
The interest rate of 2.75% per annum on the gold bond is over and above the appreciation in the value of gold. While physical gold does not give any regular income, the investor benefits when price appreciates. However, in gold bond the investor has twin benefits of annual interest and price appreciation of the metal. So, the interest earned on gold bond is an added benefit over the physical gold. However, the value of the gold bond is subject to the volatility of the global gold prices. The bonds can give negative return if gold prices go down. To mitigate this volatility, the government is issuing the bonds for eight years with an option to exit after five years.
Gold bonds also score over ETFs as there are no fund management charges. But unlike gold ETFs, liquidity in gold bonds could be an issue. As gold ETFs are actively traded on the exchanges, one can easily liquidate their position any time during the market hours. Gold ETFs are better for those investors who do not want to invest in lump sum and invest in systematic investment plan over a period of time.