Recent developments have revealed that the Government of India (GoI), in association with the Reserve Bank of India (RBI), has chosen to release Sovereign Gold Bonds (SGBs) in six installments ranging from April 2020 to September 2020. The decision to release these Gold Bonds comes in the midst of the novel coronavirus’ disruptive effects on financial markets globally, but the allure of gold as a reliable investment grows.
Understanding Sovereign Gold Bonds
Sovereign gold bonds act as government securities denominated in grams of gold, essentially serving as substitutes for holding physical gold. These bonds are issued by the RBI on behalf of the government. Originating from a scheme launched in November 2015, the purpose behind SGBs is to decrease the demand for physical gold and redirect a portion of domestic savings towards financial savings.
The Process of Buying and Selling
Investors purchase these bonds at their issue price in cash. Once they reach maturity, the bonds will be redeemed in cash. The issue price refers to the cost at which bonds are initially available to the public. Apart from potential capital gains due to an increase in gold prices at redemption, investors receive a fixed interest rate on their investment throughout the bond’s lifespan. A 2.5% per annum interest rate, payable semi-annually, is set by the government.
Tenure and Eligibility For Sovereign Gold Bonds
The Sovereign Gold Bonds have a tenure of eight years with exit options available from the fifth year onward. The sale of these bonds is limited to resident individuals, Hindu Undivided Families (HUFs), Trusts, Universities, and Charitable Institutions. An investment unit must be a minimum of 1 gram of gold.
Procuring Bonds: Where and How
Investors can procure these bonds through designated scheduled commercial banks (excluding Small Finance Banks and Payment Banks), Stock Holding Corporation of India Limited, and designated post offices. National Stock Exchange of India Limited and Bombay Stock Exchange (BSE) Limited also offer these bonds for purchase.
The Benefits of Investing in Sovereign Gold Bonds
Investing in gold via Sovereign Gold Bonds is often portrayed as a strategic move for portfolio diversification. Along with the potential for capital appreciation, investors receive a fixed interest rate. Additionally, these investments are tax-efficient since there is no capital gains tax levied upon redemption at maturity. They also provide an investment option that doesn’t require physical storage of gold.
Disadvantages of Sovereign Gold Bonds
Despite the benefits, investing in Sovereign Gold Bonds has some drawbacks. It is a long-term investment, unlike physical gold that can be sold at any time. While these bonds are listed on exchange, trading volumes are typically low, making it challenging to exit before maturity.
