The government has launched the fourth tranche of Sovereign Gold Bond (SGB). The issue is open till July 22 and the price for bond has been fixed at Rs 3,119 per gram of gold. The government has reduced the minimum subscription denomination to one gram in the fourth tranche from two grams earlier. An individual or an institution can invest up to 500 gm. The interest rate is fixed at 2.75%, payable every six months.
The bonds can be purchased from NSE and BSE, besides all bank branches, select post offices and the Stock Holding Corporation of India Limited. The tenure of the bond will be for eight years with exit options in fifth, sixth and seventh year. Gold bonds are issued in denominations of 1, 2, 5, 10, 50 and 100 grams. 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 has also said that long-term capital gains arising to any person on transfer of sovereign gold bonds will be eligible for indexation benefits.
A sovereign gold bond is an alternative to addressing the investment demand for the yellow metal. It was launched last year in November in an effort to reduce demand for physical gold by providing an alternative investment instrument linked to gold. The funds raised through the bonds are part of the government’s market borrowing programme. The first three tranches had attracted an investment of Rs 1,318 crore, equivalent to 4.9 tonnes of gold at the then prevailing prices. Every year, India imports about 1,000 tonnes of gold and the precious metal is the second-biggest constituent of the import bill after crude oil. In the first three months of FY17, India imported gold of $3.9 billion as compared with $7.5 billion in the same period in FY16.
In recent months, gold prices have surged from Rs 30,000 per 10 grams (24 carat) to Rs 31,500 per 10 grams now. It was around Rs 33,000 a fortnight back. The rate of current tranche of SGB has been fixed on the basis of simple average of closing price of gold of 999 purity for the week July 11 to 15, 2016 as published by the India Bullion and Jewellers Association Ltd.
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.
While most Indians prefer to invest in the precious metal in the physical form, gold exchange traded funds (ETFs) of mutual funds 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. 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 lumpsum and invest in systematic investment plan over a period of time.
While 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.
Golden opportunities
* The price for bond has been fixed at R3,119 per gram of gold
* Minimum subscription denomination is one gram; maximum 500 gm
* The interest rate is fixed at 2.75%, payable every six months
* The tenure of the bond will be for eight years
* Gold bonds score over ETFs as the former will earn an interest
* However, unlike gold ETFs, liquidity in gold bonds could be an issue
