Sovereign Gold Bonds: Benefits of investing, unique features of SGB explained with example

June 10, 2020 11:20 AM

SGBs are issued by RBI on behalf of the Government of India and hence the bonds carry a sovereign guarantee on payment of interest and repayment of principal on maturity.

 Sovereign Gold Bonds, benefits, SGB, rbi, maturity, interest rateThe Sovereign Gold Bonds are tradeable on Stock Exchange which adds on to the liquidity feature.

By Mohit Mittal

Over the last three months, the shine on the Gold continues to be there and the price per gram is nearly Rs 48000. Gold has always been the favourite asset class in Portfolio of most of the Indian Investors and to avoid the risk attached with investment in Physical Gold, RBI has announced multiple series of Sovereign Gold Bond this year.

Sovereign Gold Bonds (SGBs) are issued by Reserve Bank of India on behalf of the Government of India and hence the bonds carry a sovereign guarantee on payment of interest and repayment of principal on redemption or maturity.

Benefits of investing in Sovereign Gold Bonds are as follows:

1. Assurance of Safety: Govt of India Security

2. Zero Risk of handling Physical Gold

3. Easy Exit Options: Tradable on Exchange and Exit options after 5 years.

On 8th June 2020, RBI has come up with Series III of Sovereign Gold Bond Issue 2020-21 offering Issue Price of Rs. 4,677 (with a discount of Rs. 50 for Online Mode). The Issue is open till 12th June 2020 and considered to be a huge opportunity for retail and HNI investors who are looking for Gold Investments.

Also, investment in Gold is a hedging tool and a trusted diversification investment option. Further, investment in Gold Bonds eliminates the risk of keeping physical gold in custody. The investment in Gold Bonds qualify for the equal appreciation which physical gold offers in long term and in addition to it Sovereign Gold Bond offers 2.50% fixed interest rate per annum, making it more lucrative investment option.

The minimum amount an Individual can invest is Rs. 4,627 (4627*1gm) while maximum Limit is 4000 Gms (4KGs) while for Trust and Institutions the maximum Limit is 20 Kgs. Bond Tenor is 8 years with an option to exit from 5th year onwards to be exercised on interest payment dates.

Also, the Bonds are tradeable on the Stock Exchange which adds on to the liquidity feature. The value of SGBs is linked to the price of physical gold. An investor can participate fully in any future movement in Gold price with a possibility of gains/losses from Gold price rise/fall respectively.

Transfer or sale of bonds before the redemption / maturity date is not exempt from Capital Gains Tax. Indexation benefits on long term capital gains shall, however, be available for such transfer/sale if it qualifies as a long term capital gain.

Some unique features which make SGBs more attractive than Gold ETFs:

1. Fixed interest along with capital gains

This is not conceivable with any other form of gold investment. The physical gold investment gives us gains out of the price rise. No price rise, no profit. But the gold bond is the only method of gold investment which offers you assured interest along with the price rise benefit. Interest rate is 2.5% p.a. payable semi-annually.

Let us understand it by an example-

Suppose you buy 10 units (10 gm) of gold ETF and 10 units of gold bond simultaneously. Since the market rate of gold is around Rs 46,000/10 gm, the price of both these purchases is almost Rs 46,000.

Assuming after 5 years the market rate of gold goes to the Rs 66,000*. In this scenario, the value of your ETF investment and gold bond investment would also become almost 66,000. It would be a profit of Rs 20,000 in 5 years. This profit is because of the price rise. It is called as the capital gains. But, in the case of gold bond, along with this capital gain, you would also get interest. The prevailing interest rate of gold bond is 2.50%. So, the interest would be Rs 5,750 [46,000*(2.50/100)*5] in five years. You can see that in the case of gold bond you would be able to earn extra Rs 5,750. Your total profit would be Rs 25,750 (20,000+5,750).The annual return of both the investment will be as follows:

Annual return of Gold ETF = 7.49%

Annual return of Gold Bond = 9.30%

* Considering past 5 years Gold Returns

2. No Expenses

The gold ETF management companies charge about 1% of the fund value as the expense. While there are no such charges applicable in Sovereign Gold Bond Scheme.

3. Government Guarantee, No Chance of Default

This feature is very important for conservative investors. The Gold bond issued by the government of India is more secure than the Gold ETF.

4. Loan against Gold Bond

The gold bond gives a unique facility. Investors can take a loan against the gold bond. It can be used as a pledge to get a cheap loan from the banks. Like National saving certificate (NSC), the gold bond can be pledged. Banks would readily accept it as a pledge, whereas, the gold ETF and gold bullion can’t be used as the pledge to avail loan from banks. The RBI has restricted banks and NBFCs to lend against the gold ETF and bullion. Till now the loan was given against the gold jewellery. The loan to value ratio of gold loan against jewellery would be also applicable for a gold bond.

(The author is Product Head – Investments, Bajaj Capital)

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