Invest in Sovereign Gold Bonds for diversification

Fifth tranche of Sovereign Gold Bonds opens for issue on September 1, 2016. The issue will be open for subscription till September 9, 2016. Let’s look at the salient features and whether you should consider investing.

What is the issue price?

The issue price in this tranche is Rs 3,150 per gram.

The issue price is the simple average of price of .9999 purity gold in the last week as published by Indian Bullion and Jewellers Association (IBJI).

You can see that the price of gold has risen sharply in the last 10 months and that reflects in the issue price of gold bonds too.

Points to Note

1. You can invest in multiples of 1 gm of gold. Maximum subscription during the entire financial year will be 500 grams per investor.
2. In case of joint investment, the investment limit will be applied to first applicant.
3. You will get an interest of 2.75% p.a. Interest will be credited to your bank account on semi-annual basis.
4. Interest from Sovereign Gold Bonds is taxable.
5. There is no tax benefit for investing in Sovereign Gold Bonds.
6. Sovereign Gold Bonds are issued by the Reserve Bank of India on behalf on Government of India. Hence, there is no credit risk. Unless the Government of India defaults. Unlikely.
7. You can take loans against Sovereign Gold Bonds (as collateral) just like you can do against physical gold.

How can I exit?

The bond matures after 8 years. After 8 years, Government will return you the amount as per the prevailing price of gold. You will not get back physical gold.

So, if you had purchased 20 Sovereign Gold Bonds (20 gms of gold), you will get amount equivalent to 20 gms of gold at the time of maturity. (20 gms X Average price in the previous week as published by IBJA).

Hence, your investment is subject to fluctuations in gold price. It can even result in loss if the gold price at the time of maturity is lower than the subscription price. However, that can happen with any mode of gold investment.

You also have an option to redeem your invest after 5 years on interest payment dates.

You can also exit in the secondary market.  The bonds will be listed on stock exchanges.

The first three tranches of Sovereign Gold Bonds have already been listed on stock exchanges. However, there is little liquidity. You must keep this aspect in mind. For you to sell in the secondary market, there has to be someone who is willing to buy and buy at a price you are willing to sell at.

What will be tax liability?

The capital gains taxation is in line with physical gold.

There is no capital gains tax on redemption i.e. if you sell the bonds back to the Government, there will be no tax liability.

The Government effected this change by incorporating following clause in Section 47 of the Income Tax Act (for transactions not to be considered as transfer):

any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual;

However, this tax exemption is only for redemption.

There is no such benefit on sale in secondary market.

Short term capital gains will be taxed at your marginal income tax rate.

Long Term capital gains will be taxed at 20% less indexation.

How to invest in Sovereign Gold Bonds?

The bonds are available in both paper and demat format.

You can invest through your bank and post offices. Many trading portals such as ICICIDirect also permit you to invest online.

Where Sovereign Gold Bonds score over other modes of investment?

You get interest rate of 2.75% p.a. No other mode of gold investment offers interest income.

There is little risk of theft when you purchase the bonds in demat format. With physical gold, you have this risk. However, this risk can be easily done away with by renting a bank locker.

With SGB, there are no transaction or management charges as in case of gold ETFs or gold mutual funds. Such charges may affect your returns of investment in gold.

Gold jewellery is, in any case, is insipid route for investing in gold since you will have to incur making charges. Making charges will affect your returns significantly.

Who should invest in Sovereign Gold Bonds?

You need to look at the end use.

You can’t wear Sovereign Gold Bonds as an ornament (unlike jewellery). SGB is a pure investment product. Hence, SGB is no use if you plan to purchase gold to attend a wedding.

At the moment, liquidity in secondary market in Sovereign Gold Bond is quite low. Hence, if you are planning to profit from short term movement in gold prices, SGB may not be the best product.  Gold ETFs or Gold MFs may be better suited for trading purposes. However, liquidity in some of the Gold ETFs is also not very high. You must check this before investing in Gold ETFs.

Sovereign Gold Bonds are best suited if you are looking to invest in gold for diversifying your portfolio. When you add an asset to your portfolio, you do not look to dispose it off too soon. Gold can be extremely useful in cases of high inflation or sharp currency depreciation. You get an interest income of 2.75% p.a. too.

Additionally, consult with your family what form of gold investment they are comfortable with. They may be more comfortable holding physical gold than Sovereign Gold bond. I wouldn’t say you go by what they say but don’t ignore their preference either.

Isn’t the Gold price too high at the moment?

I am not an expert in Gold price movements. Hence, I cannot comment whether gold prices are too high or too low at the moment. However, if you are investing in gold for diversification purpose, you shouldn’t worry too much about it.

I wouldn’t. RBI comes out with these issues on a regular basis. If you think the price is too high, purchase a small amount now and stagger your investment over future tranches.

That’s the way you invest in equity mutual funds. Don’t you?

Planning to invest in Sovereign Gold Bonds? Let me know in the comments section.