Indians treat Gold not just as an asset class but a symbol of prosperity. For ages it has been the traditional form of investment in India.
What if such a commodity can be bought at 10% discount? Current prices of Sovereign Gold Bonds (SGB) offer such an opportunity and these are listed on NSE. Unlike other forms of holding gold, SGBs offer an interest at 2.5% per annum.
(SGB maturing in Nov 24 (SGBNOV24) is available at 2756 per one gram against market price of 3080 as of prices quoted on 26th Sep)
SGB route is a great form of exposure to gold compared with having Physical Gold or investment in Gold funds.
Gold is considered a natural hedge against inflation and a better bet in times of market volatility. One should allocate at least 5% to 10% of their investments in gold to bring down the volatility of their overall portfolio.
Advantages of Sovereign Gold Bonds over Physical Gold/Gold ETFs
- SGBs offer 2.5% annual interest while physical gold is an idle asset and ETFs do not offer any interest.
- SGBs can be held in De-materialized form or as a Certificate of Holding, hence no risk of theft and no wear and tear.
- They can be redeemed at 999 purity while purity of gold ornaments/bars/coins is always suspect
- Cost of holding is very cheap compared to physical gold which requires paying locker rents for safe keeping
- Ornaments/Coins/Bars come with a making charge hence cost is much higher than actual value of gold, whereas SGBs come at market value.
- SGBs are exempt from capital gains if held till maturity, whereas physical gold and ETFs attract long term capital gains.
SGB Scheme Features
| Features | ||
| Sr. no. | Item | Details |
| 1 | Issuer | RBI |
| 2 | Eligibility | Resident Indians – Individuals, HUF’s, Trusts, Universities & Charitable Institutions. |
| 3 | Tenor | 8 Years (Exit option from 5th year) |
| 4 | Minimum Investment | 1 Gram of Gold |
| 5 | Maximum Investment | Individuals & HUF – 4 Kg & Trusts – 20 Kg per fiscal year |
| 6 | Interest Rate | Fixed rate of 2.50% per annum, payable semi-annually on the amount of initial investment. |
SGBs at a Discount
Presently, Sovereign Gold Bonds are trading at a discount to physical gold. This is purely because of liquidity. But if one is planning to hold the bonds till maturity one can expect to get a discount of around 10% to 12% on various maturities. This gives a great opportunity for investors who are planning investment in gold assets. They can reap the twin benefits of earning interest on their investments and tax exemption on capital gains. Many of us have the tendency of buying gold for a future event like child’s marriage. The jewelry so purchased may not be in vogue when the children grow up. Exchange of gold for newer designs incurs cost and loss of value. Investing in SGBs makes sense as full market value can be realized at the time of redemption.