Gold monetisation, bond schemes: Should you invest?

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New Delhi | Updated: Sep 12, 2015 11:43 AM

We take a look at the benefits of both the Sovereign Gold scheme and Gold monetisation scheme and the important aspects of the scheme.

Gold monetisationThe government on Wednesday approved Gold Monetisation and Sovereign Gold Bond financial schemes that were introduced in the Union Budget 2015-16. (Express Photo)

The government on Wednesday approved Gold Monetisation and Sovereign Gold Bond financial schemes that were introduced in the Union Budget 2015-16.

We take a look at the benefits of both the Sovereign Gold scheme and Gold monetisation scheme and the important aspects of the scheme.

Gold bond scheme

Those looking to invest in gold may find gold bonds a better option for investing in gold than buying physical gold or investing in gold ETFs or funds of mutual funds. The bonds will be issued in rupee. They will be issued in denominations of 5,10,50,100 grams of gold or other denominations. An upward investment cap of 500 grams per person per year would be made available at banks, NBFCs, post offices etc.

“In sovereign gold bond scheme, instead of buying gold in physical form investors can park their money in bonds which are backed by gold. The bond has more or equal advantage against the physical gold. The Bonds will be issued on payment of money and would be linked to gold prices. The bonds will be issued by RBI on behalf of the Government of India. It is restricted for Indian entities and the maximum allowable limit is 500 grams per person per year. The government will issue bonds with an appropriate rate of interest and which shall be payable in terms of grams of gold. Banks/NBFCs/Post offices may be authorized to transact on these bonds on behalf of the Government for a fee. The bonds will be available in various denominations and the minimum tenor of the band could be around 5 to 7 years,” said Hareesh V, research head, Geofin Comtrade said.

Nomura Japanese brokerage firm believes the Sovereign Gold Bond (SGB) scheme may have a higher chance of succeeding and would potentially cut India’s gold import bill.

It says, “the SGB scheme may have a higher chance of succeeding, as it is sovereign- backed and provides an attractive investment option for households that would like to hold gold as part of their investment portfolio and earn a coupon along the way.”

Below are the 5 factors that make it attractive

1) Interest rates: All other gold investing instruments only offer returns tracking gold prices. However, sovereign bonds look to offer interest rates over and above the capital gains on account of price rise. It could go up to 3% per annum.

2) Loan against bond: While individuals can hold the bond and earn interest and capital gains over the term of the investment, in need of money they can even go to a bank and offer the bond as collateral to take loan against it at a loan-to-value ratio permitted by RBI.

3) Distribution cost: The details of the scheme state that all cost relating to distribution and sales commission that will be borne by the issuing agency will be reimbursed by the government.

4) Tax benefits: the government has proposed to announce tax benefits on capital gains in the upcoming budget 2016-17.

5) Liquidity: While the minimum tenor of the bond is likely to be 5-7 years, the bonds can be sold anytime as they would be traded on exchanges and thus will allow easy exits.

Gold monetisation scheme

While India is a huge importer of gold, the government, in a bid to reduce imports of the yellow metal, has proposed the gold monetisation scheme that aims to bring domestically held gold into circulation by encouraging individuals to get the metal melted, deposit it with banks and also earn interest on it.

“The gold monetisation scheme is aimed to mobilise the surplus gold holdings held with Indian households and institutions as deposits. Under the scheme, gold lying idle with people can be deposited in banks and generate interest. The return from these deposits is totally tax free. The deposited gold will be melted and make available for jewellers as raw material so as to restrict the increased dependence of imported gold,” said Hareesh V, research head, Geofin Comtrade.

According to reports, the government is planning to launch the gold monetisation scheme around Diwali with an interest rate of 1.5-2 per cent on gold deposits, however, the timing of the launch will be decided in consultations with the Reserve Bank.

“Since India is one of the biggest consumers of the yellow metal, the approved scheme will help the nation unlock the gold kept in households and bring it in the investment platform for consumers benefit. The scheme will be a big boost, reducing gold imports, in turn lowering the current account deficit, Naveen Mathur, associate director, commodities & currencies, Angel Broking said.

Below are the three important aspects of the scheme.

1) Interest rate: The new scheme which is on the lines of GDS 1999 seeks to offer a higher interest rate. While the 1999 scheme offered interest between 0.75 per cent and 1 per cent for tenures between three to five years, the new scheme can offer up to 2 per cent.

2) Minimum deposit and tenor: The scheme would allow individuals to deposit a minimum of 30 grams of gold bullion in the account and it can be deposited for a short-term (one to three years); medium-term (five to seven years) and long-term (12-15 years).

3) Gold deposit and redemption: Jewellery and coins held by individuals will have to be taken to the purity testing centre and will have to be melted before they can be deposited into the gold account. While redemption in case of short term deposits can be done in either cash or gold, in case of medium and long term it would be only cash.

With inputs from Indian Express’ Sandeep Singh

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