Sovereign Gold Bond Scheme – is it for you?

Gold has been a part of the Indian investor’s portfolio since before we had portfolio’s to invest in. Even today, many communities prefer to park their money in gold, and gold only. The wealth of the family is stored in the form of jewellery, and the amount of gold ornaments displayed on the neck and arms of the women is like an advertisement of social status.

sovereign gold bond scheme India

But for the more modern investor, gold is only a part of a diversified basket of investments, and for many, it does not even feature in their investing plans at all. That said, there is a lot to be said for keeping some gold in your investment basket. Keep in mind that by its nature, Gold is a hedge against market fluctuations. In times of high volatility in stock markets and bond markets, investors prefer to park their funds in gold, driving prices high. Also, in the Indian context, as the Rupee depreciates against the dollar, the price of gold as denominated in Indian rupees will tend to rise, since the gold that is bought and sold in India is imported.

Investment advisors typically advise keeping about 5 – 10% of your investment allocation for Gold, seeing it as a hedge against stock volatility. Until recently, the only way to do so was to buy physical gold, either in the form of gold coins or jewellery and store it safely, either in Bank lockers or safes at home.

More recently, the alternative of purchasing Gold Funds, either in the form of exchange-traded bonds or Mutual Funds was made available and has become fairly popular. This option is superior to holding physical gold for those who are eyeing gold as an investment, due to the following factors:

  1. No need to spend on safe storage of the physical gold
  2. No making charges when buying
  3. No deterioration charges when selling
  4. Can be held in demat form and easily traded

In November 2015, the Government announced a Sovereign Gold Bond (SGB) Scheme which allows investors to invest in Gold in the form of Bonds, priced at the average prevailing market price of gold, directly from the Reserve Bank of India (through Banks / Post Offices / Stock Holding Corporation of India). Offering an interest rate of 2.75% p.a. this Scheme provides an even better way to remain invested in Gold without the burden of physical possession.

On redemption, the investor will get an amount equivalent to the prevailing market price of gold on redemption day.

The SGB not only offers the four advantages of Gold funds mentioned above, but also the following additional benefits:

  1. No ‘fund management’ fees or ‘brokerage’ as is applicable for the funds
  2. The interest payable, though not very high, is still an income that you do not get when you are only investing through the funds.

Further, you can raise a loan against such Bonds, as you can with physical or fund gold, at the same margins as for ordinary Gold loans. The maximum amount that can be invested under the SGB is upto the value of 500 grams of gold at prevailing rates, and minimum is 2 grams.

The downside of SGB is that there is a designated lock-in period of 8 years before the Bonds can be redeemed. Though these bonds will also be listed on stock exchanges and can be bought and sold, it is not yet known whether there will be a vibrant market for the same.

As with any other form of holding, whether the investment will pay off or not depends on the movements in the price of gold over the period of time that you hold the Bonds. Tax implication will be identical regardless of whether you hold your gold in the form of physical bullion, Funds or SGB.

Therefore, all things considered, it is safe to say that the Sovereign Gold Bonds are the best way to invest in Gold at present. No other instrument gives you a guaranteed value of the precious metal as well as a return on investment. Whether it is purely for hedging your portfolio against market risks or to provide for the wedding jewellery of a son or daughter, set aside a part of your surplus funds for the Sovereign Gold Bonds.

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Kunal is an ex-banker with a (largely self-proclaimed) flair for writing. He is an associate member of the Institute of Chartered Accountants of India and an MBA from Narsee Monjee Institute of Management Studies (NMIMS), Mumbai.

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