Are Sovereign Gold Bonds (SGBs) right for you?
Here comes the season of festivals, of giving and taking gifts. And one fine morning amidst these festivities, you decide to gift your wife a large sum of One Lakh Rupees. Without a second thought, your wife decides to buy a nice gold jewellery piece and showcase it to you that very evening along with your ever favorite dishes prepared on the dinner table. Right? Wrong? Let’s see this in light of the latest issue of SGBs announced by the Govt of India.
Gold in its physical form- jewellery or ornaments have always been popular among Indians, especially women In India. It is considered auspicious to buy gold on the day of Dhanteras. Unlike in the past when gold was only considered as a hedge against Inflation and held entirely in physical form, today it finds a place even in an Investor’s portfolio and that too largely as ‘paper gold’ – earlier as Gold ETFs and now as SGBs, the latter increasing in their popularity as the Govt pushes them to the citizens.
Sovereign Gold Bonds (SGBs) are government securities issued by RBI on behalf of Government, as a substitute for holding physical gold.The current tranche of SGBs are being issued from 25th Octtill 2nd Nov 2016 at a discount of Rs50 per gram and are being offered at a price of Rs2957 per gram, being the lowest Gold price till now this year.
Features of SGB
- Paper gold like SGB offers many advantages to Indian investors as the quantity of gold for which the investor pays is protected, and the investor will receive market price of Goldprevailing at the bond maturity.
- The risks and costs of storage are eliminated.
- Unlike ETFs, they have ZERO expense ratio plus you get additional interest of 5% which will be credited in Investor’s bank account semi-annually. This is a big plus as you get Gold and you get interest too.
- SGB is free from issues like making charges and purity problems of gold in jewellery form.
- The value of your SGBs will fluctuate with the price of Gold.
- SGBs can be held in Joint names and also in the name of a minor with a Guardian. Investors can apply for the same online via listed websites of Banks. Know-Your-Customer (KYC) norms will be the same as that for purchase of physical form of gold.
- Minimum investment in the Bond shall be one gram with a maximum buying limit of 500 grams per person per fiscal year (April – March). In case of joint holding, the limit applies to the first applicant.
- SGBs areeligible to be used as collateral for loans from banks, financial Institutions and Non-Banking Financial Companies (NBFC).
- Though the tenor of the bond is 8 years, early encashment/redemption / part-redemption of the bond is allowed after 5thyear from the date of issue on interest payment dates.
- The bond will be tradable on Exchanges, if held in demat form. It can also be transferred to any other eligible investor.
Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961. There will be no capital gains tax arising on redemption of SGB to an individual. Indexation benefits will be provided to long terms capital gains arising to any person on transfer of bonds.
Payment can be made through cash (uptoRs. 20,000)/cheque etc. Nomination facility is available. The bonds are tradable from a date to be notified by RBI.
Are theythe right fit for you?
- The major advantage of SGBs is that they will help you earn anextra interest of 2.5% per annum while you hold the bonds.
- Gold ETFs provide much better liquidity than SGBs but this extra interest part is unique to these bonds. So, if you’re wanting to own some Gold for the purpose of investments, or maybe even putting some money in Gold for future requirements so that you future-proof it against fluctuations in Gold price, SGBs would be one of the good ways to do it.
- However, it is a fixed period kind of investment of 5 to 8 years – makes sense if your Gold requirement is coming up during that time.
- What about Gold as an investment for future – well that’s a different story altogether. Not more than 5% of your overall portfolio should be Gold, if at all.
- Please remember that Gold could be as volatile as equity and past long-term trends of Gold no longer hold good now due to the economic turmoil in the world.
- In the final verdict, SGBs are a good way to invest in Gold, if you do wish to do so.
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