Is Sovereign Gold Bond A Wise Investment Decision?

For most Indians, an investment in gold is more valuable than stocks and mutual funds. Nevertheless, investing in physical gold has its disadvantages. A solution to this problem is sovereign gold bonds (SGB). Vardan Pandhare elucidates the significance of SGBs in this special report

Gold has long been regarded as one of the top investment prospects in India. It is important to most festivals and festivities and is relevant to the culture. Many people think that gold is lucky and prosperous. It does, however, have some restrictions, particularly if purchased as jewellery, coins or bars. For starters, physical gold is difficult to keep securely. Gold might be unsafe to store at home while a bank locker can be expensive. Also, there are other expenses like making charges. All of these inconveniences are avoided by sovereign gold bonds, which also provide improved investment prospects, security and storage simplicity. This gold bond programme is a great alternative to actual gold. [EasyDNNnews:PaidContentStart]

Sovereign Gold Bonds

In November 2015, the Indian government unveiled the sovereign gold bond (SGB) plan as a substitute for actual gold for investors. SGB keeps track of the asset’s export-import value while also ensuring transparency. Government securities known as SGBs are regarded as secure. They are valued in multiples of a gram of gold. SGBs have seen a sharp rise among investors because they are seen as a viable alternative to actual gold. All you need to do to obtain an SGB is to speak with a SEBI-authorised agent or broker. The corpus (as per the current market value) will be transferred into your registered bank account once you have redeemed the bond.

Key Features of SGBs

Some of the significant key features of sovereign gold bonds are:

■ Fixed Price: The cost of a gold bond is determined using data from the India Bullion and Jewellers Association Ltd.’s publication of the daily average closing price of 999 purity gold (IBJA). The price of the preceding three working days of the week before the subscription term is used to compute the average. n Fixed Interest Rate: The 2.5 per cent annual return rate on the gold bond programme is fixed and is distributed twice a year.
■ Duration: Sovereign gold bonds have investment duration of eight years. These bonds also have a specified lock-in duration of five years during which you cannot redeem your investment.
■ Subscription Quantity: Gold bonds are available in subscription quantities of one gram of the metal. At least one gram of gold should be the minimum subscription amount. For HUFs and individual investors, the limit is 4 kg. Nonetheless, businesses and trusts are permitted to buy up to 20 kg of gold. Every fiscal year is affected by these restrictions.
■ Taxation: Interest and capital gains are the two forms of returns offered by sovereign gold bonds. Long-term and short-term capital gains are the two further categories. You don’t pay long-term capital gains tax on your profits if you keep the bond for the whole eight-year duration. Nonetheless, indexation advantages and long-term profits from resale are taxed at 20 per cent after three years or longer of owning the bond. Bonds held for less than three years might generate short-term capital gains that are added to your yearly income and taxed under your tax bracket.
 

SGBs an Apt Investment Avenue

As a good investment choice, SGBs have the following benefits:

■ Minimal Risk: Because the Indian government is backing these bonds, they are a secure form of investment. Although gold is one of the best hedges against inflation and market instability, they are also comparatively steady against volatility.
■ No Extra Expense: Sovereign gold bonds do not have any additional fees, unlike actual gold which has costs connected with it such as manufacturing charges, exchange fees, etc. You receive the bond’s value according to the current value rates. Furthermore, you save money that you would have otherwise spent on a bank locker because you don’t need to physically keep bonds.
■ Safe and Secure: Storage is simple and secure for SGBs. The inconveniences associated with real gold are absent. The bonds can be kept in your demat account in a dematerialised form. It is not necessary to have a demat account to buy gold bonds, though.
■ Tax Benefits: As long as you maintain the investment until it matures, there is no tax on your gains. Your profits will be maximised as a result.
■ Pureness Guaranteed: As there is no assurance, the purity of actual gold may be of concern. Each vendor may be offering a unique item. In the case of gold bonds, you may be confident that your investment is in gold of the finest quality and is secured by a government guarantee.
 

Pros and Cons

Here are some of the factors in favour of SGBs:

■ The procedure for investing is straightforward and you may do it offline or online using your trading or bank account. Moreover, just a minimum KYC based on PAN is needed.
■ Government guarantee for the interest and principal in units of gold eliminate any default risk associated with this investment.
■ The post-tax return increases significantly if you retain the bonds for the whole eight-year term because the capital gains are completely tax-free.
■ You have a lot of flexibility when investing in gold bonds. A minimum of 1 gram and a maximum of 4 kg per investor are allowed. Each family member may contribute up to 4 kg if there are numerous members.
■ It is like having gold without the difficulties of actual possession because the SGB price increases together with the price of gold. SGBs are far less expensive to hold than actual gold. n Like gold ETFs, SGBs reflect the price of gold, but they also offer the benefit of 2.5 per cent annual interest on the investment.
 

Here are some factors that are not so much in favour of SGBs:

■ SGBs are subject to gold price risk. We have already observed that the price of gold has been on a long-term downward trend. For instance, the price of gold dropped dramatically from USD 980 per ounce to USD 240 between 1981 and 1999. SGBs would not turn a profit under these circumstances.
■ For SGBs to be exempt from capital gains tax, eight years of holding are required. The capital gain is taxed if the holding falls below that level. Also, interest income is completely taxed at the highest rates.
■ Although SGBs are typically listed on stock exchanges after six months of issuance, there is relatively little secondary market activity. Perhaps there isn’t enough liquidity or the prices are unfairly distorted.
■ Unlike gold ETFs which are available at real-time gold prices with total liquidity, SGBs are only available in tranches and exit is only possible when the government opens the repurchase window after five years.

Update on Series IV Tranche

Following the launch of the 2022-23 Series III tranche in December 2022, the new tranche, namely, 2022-23 Series IV opened for subscription on March 6, 2023. The subscription window closed on March 10, 2023. Bonds would be issued on March 14, 2023. The issue price will be declared when it opens for subscription. However, looking at the recent trends in gold prices, it is likely to be higher than the issue price of December 2022, which was around Rs 5,409 per gram.
 

Target Investors for SGBs

So who should buy sovereign gold bonds?
1. Individuals interested in gold investments.
2. Those seeking large profits with less risk.
3. Those seeking to diversify their financial portfolio.
4. Those who want to protect themselves against inflation.
 

Conclusion

SGBs provide a more effective, profitable and affordable way to store gold than real gold. It has the advantage of a government guarantee in addition to being a profitable asset that earns interest. When there is economic turbulence, geopolitical unpredictability or a decline in the value of major currencies, gold often outperforms other asset classes. At this time, we may see glimpses of all three in the world economy. One simply needs to analyse the Russia-Ukraine scenario and the current political climate in Europe. In these unsettling times, gold is viewed as a safe haven investment and is therefore in high demand.

Finally, any choice to invest in gold must be considered in the context of your total portfolio composition and long-term objectives. For your portfolio to have a safety net in uncertain times, an exposure of 8–12 per cent to gold is usually ideal. One must keep in mind that unlike the equity market, gold does not generate wealth over the long term. It should be the overarching principle that eventually guides your gold investing choice. It is equally important to weigh the pros against the cons before making the final choice of investing in sovereign gold bonds. 

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