Sovereign Gold Bonds (SGBs) is a term used to signify government securities that are denominated in gold. Sovereign Gold Bonds are great substitutes for buying physical gold. Find out more about them.
Gold is one of the highly demanded precious metals and the market demand tends to be relatively high irrespective of the market variations and global economic scenarios. Hence, unsystematic risks are minimal, allowing investment corpus to grow manifold over time.
RBI mandated sovereign gold bonds are certified and given against grams of gold, allowing users to invest in gold minus the strain of safekeeping their physical assets. These bonds act as a tool for secure investment among individuals, as gold prices are less susceptible to market fluctuations. The popularity and widespread demand for gold mean that prices of such assets tend to rise significantly over time.
As Sovereign Gold Bonds are given by the RBI under Government of India stocks, a particular time slot is pre-set for a subscription. During this time, a sovereign gold bond scheme is issued in the name of investors in tranches.
Generally, the RBI publicly states the issuance of the latest sovereign bonds in a press release every 2-3 months, with a one week window during which individuals can subscribe to this scheme.
Sovereign Gold Bond: Features, Pros and Cons
Key Features of Sovereign Gold Bonds
- Updated price – The cost is calculated through a simple average of the closing prices of 999 purity gold for the last 3 days set by the Indian Bullion and Jewellers Association Limited (IBJA).
- Periodic interest pay-outs – A coupon rate of 2.5% per annum is tagged for this scheme, which is disbursed half-yearly to investors.
- Fixed tenor – Gold bonds are given for a period of 8 years, with premature withdrawal permissible from the 5th year onwards. Also, individuals can put up their respective securities in the secondary market for sale at the market rate of gold.
- Premature withdrawal – Individuals who want to cash-in their investment can after a mandatory holding period of 5 years. This payout benefit is applicable for the 5th, 6th, and 7th year of bond tenor, and will be processed on the interest disbursement days.
- Resale – The Sovereign gold bond scheme 2020 can be traded in the secondary market after 2 weeks since an initial subscription date, subject to a notice published by the RBI. Prices at which these bonds are transacted varies on the prevailing gold prices on the stipulated date, in addition to its corresponding demand and supply in the market.
With the maturity of a sovereign bond, payouts are made in accordance with the prevailing price of gold, estimated through considering a simple average of the price of gold for the last 3 days, and is published by the IBJA. As the price of gold usually seems to appreciate considerably over time, individuals can enjoy substantial wealth accumulation with minimal risk exposure.
Advantages of Investing in Sovereign Gold Bonds
A sovereign gold bond is given in accordance with the Government Security Act of 2006 by the RBI, making it one of the safest forms of investments, as chances of defaults on repayment is zero. Any risk calculated for such investments can be attributed to market fluctuations, causing volatility in gold prices.
Sovereign gold bonds were opened to the public under the gold monetisation scheme by the central government in November 2015. The main goal of such treasury bonds was to reduce the hassles involved with gold investments, as bullions and other physical forms of investments required proper and secure storage.
Individuals can also select to digitise such holding certificates to gain benefits from it in their Demat accounts, thus enhancing the security of their investment even further.
Sovereign gold bond returns are substantial as the long term price of this precious metal tends to rise. During market turmoil, investors tend to shift towards gold, as it has the potential to hold its value even during under performance of major functional companies.
Sovereign gold bonds are an acceptable product of collateral to avail loans. Up to 75% of the market value of such bonds can be availed as a loan from any scheduled financial institution, as stipulated by the RBI’s LTV regulations.
Limitations of Gold Bonds
Inversely Related to the Stock Market
Gold prices have an inverse correlation, wherein any upturn in stock market returns is generally followed by reduced gold prices. During an economic boom, investors expect the companies to perform well in response to surging aggregate demand level. As a result, demand for gold bonds decreases causing a downtrend in the market prices.
Hence, during the upswing of the business cycle, gold prices tend to be relatively lower.
Susceptible to Currency Fluctuations
Any fluctuation in currency values tends to have an impact on the price at which gold is traded. Appreciation of the US dollar, causes gold prices to falter due to higher inflation rates. As the import expenses of a country rise significantly, the total investment level of a country falls, thereby affecting the demand for gold and its prices.
The returns from sovereign gold bonds can be classified into two categories – capital gains earned on the maturity of a bond and interest earnings disbursed semi-annually. Investors who have a bond for the entirety of the term are not required to pay long-term capital gains tax. However, periodical interest income is taxed under ‘Income from other sources,’ and increases tax rates as per the respective income tax slabs dictated by the central government.
Individuals opting for resale of a bond in the secondary market will shell out tax on any capital gains realised. Reselling of sovereign gold bonds before completion of 3 years attracts short term capital gains on total profits, at rates as per the annual income of investors. Long term capital gains, on the other hand, attract tax at 20% of the total earnings, after adjusting the same for indexation.