We see no debates on Gold being an investor’s all-weather friend. However, this asset comes with the concern of trust and purity–two concepts that sound synonymous but are a tricky combination to get. However, the government came up with an innovative solution for this issue in November of 2015: Sovereign Gold Bonds. Let us look at some of the features and benefits of these bonds and how they differ from physical/bearer bonds.
The most significant problem a long-term investor faces is the absence of a constant income stream. This reason often forces the investors to sell a part of their securities before the targeted return. SGBs try to solve this problem to a certain level by crediting a fixed rate of return (currently 2.50% p.a) on the initial investment to the investor’s account semi-annually.
Since the bonds are kept in the books of RBI or held in one’s Demat account, there is no risk of theft or wear and tear. Also, since the bonds are maintained in RBI’s books along with the details of the investor, the chance of losing these bonds is none or negligible.
Physical gold requires storage space, be it a home locker or bank locker. While the former induces the risk of theft, the latter, although significantly safer, comes along with the annual charges for maintaining the same. Even Gold ETFs charge a portion of investment as an expense ratio. SGBs don’t charge a penny regardless of the amount and duration.
Another benefit of SGB is the huge tax relief that comes along. The capital gains at the end of the maturity period are exempted from any taxes, while the credited interests are taxed according to the income slab.
Physical gold always involves a risk of impurity, either due to fraudulent practices or the necessity to mix certain elements to make Gold useful for jewellery-making purposes. However, SGB eliminates this risk as the securities are issued to the investor at the market rate of 999 purity gold, and the same goes for the selling of bonds.
The lack of liquidity, unlike digital gold, Gold ETFs, and physical gold (to some extent), dissuades many investors from applying. SGBs have a maturity period of 8 years but can be sold anytime after five years.
Let us see how do SGBs differ from bearer or physical bonds.
|Maintained in the books of RBI or investor’s Demat account.||Unregistered bonds were first issued in the post-Civil war era in the US to reconstruct the country.|
|They are registered under the investor’s name and identification and can be redeemed by the investor(s) only.||Carry no such name or label and can be redeemed by the bearer of the bond.|
|There is no chance of loss or theft as these are stored digitally under the investor’s name.||Since no name is mentioned, it becomes extremely tough to track theft or misplacement.|
|The transfer process of a bond requires various formalities.||Change of hands is enough; it requires no formality.|
This was our attempt to explain one of the best modes of investing in gold. Although digital gold gives the ease of liquidity, one must consider SGBs to invest a decent amount of money for an extended period.
The rate is decided by calculating the simple average of the closing rate of 999 purity gold for three days preceding the subscription period. The same goes for the selling rate.
The bonds if held in a Demat account can be traded after a date announced by RBI.
The minimum amount of gold that can be bought is 1 gm while the maximum amount for individuals, HUF(Hindu Undivided Family), and a group of individuals is 4 kg. The maximum amount for a trust is kept at 20 kgs per fiscal year.
Yes. This shall be done in accordance with ordinary gold loan directives laid by RBI.