8 reasons to not miss Sovereign Gold Bonds!!

Of all the precious metals, gold is most popular as an investment and is fancied from times immemorial.

Before delving further let us understand why should one invest in Gold.

  • Investment in gold is considered safest in uncertain times, as long term returns match the inflation rates.
  • Gold is considered as a hedge against vagaries of market – be it equity, crude oil or realty.

Traditionally, Indians have been investing in gold through jewelry. This was not exactly investment – try asking your wife to sell her jewelry when the price rises and you shall know J

With advent of other options like ETF, Gold became a popular investment avenue, however, there are couple of challenges that exist and have been addressed by Sovereign Gold Bond (SGB) scheme launched by Government of India.

This is 4th issue since SGB’s launch in 2015 and there have been major changes like tax exemption, reduction in minimum investment amount etc. that make this issue all the more enticing. The rate being offered is Rs 3,119 per gram for .999 purity gold. An individual shall be allotted the number of units (1 unit = 1 gram) in either a physical certificate format or in dematerialize format.

So what are the benefits

  1. Low minimum investment – One can buy 1gm to 500 gm gold (i.e. minimum investment is Rs 3,119)
  2. No risk and cost of storage – SGB shall be issued as Certificate of Holding or dematerialized form – as per individual’s preference. This saves Locker cost associated with physical gold. Moreover, there is no hassle of safety of physical gold from external factors like theft.
  3. No making charges or purity concerns – Each unit is equivalent to 1 gram or .999 purity gold. The rate that shall be paid on maturity shall be the prevailing rate unlike jewelry that comes with making charges and impurity cut.
  4. Regular return on Investment – Unlike any other form of buying gold, SGB earns an annual interest of 2.75% payable on 6 monthly basis on the initial investment amount. This should not be compared with return on any other investment as the value of gold would still be as per market and this is additional income. This income, however, is taxable.
  5. Liquidity – Maturity of bonds is 8 years. Exit option is provided from 5thyear onwards on date of maturity. Additionally, the bonds shall be traded on Bombay and National Stock exchanges (only if held in dematerialized form) making them highly liquid
  6. Guarantee – Bonds come with Sovereign guarantee – both for principal as well as interest.
  7. Collateral for loan – Bonds can be used as collateral for loans.
  8. Tax benefit – Unlike physical gold and ETF, there is no tax on capital gains if held till maturity. If sold after holding for 3 years, long term capital gain tax is applicable after adjusting for indexation.

Comparison of Physical gold, Gold ETF and Sovereign Gold Bonds

Comparison Chart Phsical Gold vs. Gold ETF vs. SGB

Points Physical Gold Gold ETF Sovereign Gold Bond
Returns Only Capital Appreciation Only Capital Appreciation Regular return at 2.75% fixed rate of interest in addition to Capital Appreciation
Safety Risk of handling physical gold High High
Purity of Gold Purity of Gold always remains a question High as it is in Electronic Form High as it is in Electronic Form
Capital Gain Long term capital gain applicable after 3 year Long term capital gain applicable after 3 year Long term capital gain applicable after 3 year. (No Capital gain tax if held till maturity )
Collateral against Loan Yes No Yes
Tradability / Exit Route Conditional Tradable on Exchange Tradable on Exchange. Redemption- 5th year onwards with GoI
Storage Cost High None None
Lock-in period None None Only till listed on Stock exchange

Based on above, an investment in SGB is highly recommended. The issue is currently open and closes on 22nd July, 2016.

Leave a message in case you have any queries related to SGB. Confused on how to invest?? – drop a mail to fintelligenceindia@gmail.com and we shall contact you shortly.

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2 thoughts on “8 reasons to not miss Sovereign Gold Bonds!!

  1. Peeush Jain

    Very informative however what if we compare them with tax free bonds which are equally safe and offer 8.5% yield which is like pre tax return on 11.5%, they are highly liquid can be traded on BSE or NSE and comes with no lock in period. And one can hold them in electronic form.

    Reply
    1. fintelligenceindia Post author

      Peeyush, what you have mentioned is a very important and pertinent question. Following are some differences to consider while investing in any of these
      i) Tax-free bond is extremely good investment option especially for individuals in highest tax bracket. (Refer blog on Tax free bonds)
      ii) Tax-free bonds are not being issued now (no fresh issue in FY17) and those that are available in market comes with a premium and are not fetching beyond 6.9% yield (which is equivalent to 10% pre-tax for a person in 30% bracket)
      iii) With 2.75% annual interest and return of more than 8% annualized (average for any 8 consecutive year period since 1925) Gold bonds turns out to be much better option.
      iv) Both tax free bonds and Gold bonds are traded on Stock exchange so are highly liquid – albeit Gold Bonds list after a gap of around 9 months. Tranche 1 is already listed.
      v) Above all – Tax-free bonds are used for regular income while investment in Gold is a hedge against inflation.
      Individual must invest based on his/her risk profile and needs.

      Reply

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