The Sovereign Gold Bond (SGB) Scheme 2023-24 (Series I) is open for subscription from June 19 to 23, 2023, at Rs. 5,926 per gram. Investors can purchase certificates issued by the Reserve Bank of India (RBI) against grams of gold in this first tranche of the series.
The second tranche will run from September 11 to 15. The issue price of Rs. 5,926 per gram was determined based on the average closing price of 999 purity gold over the preceding three working days.
Investors may, however, can get a Rs 50 discount per gram of gold on the issue price if applied through the website of the listed scheduled commercial banks. Further, investors can receive a fixed interest rate of 2.50 per cent per annum, payable semi-annually on the nominal value.
Col. Sanjeev Govila (Retd.), a SEBI-registered investment advisor and CEO of Hum Fauji Initiatives, a financial planning firm, says: “Historically, gold has been an excellent hedge against inflation. Gold prices have been fluctuating in recent years but they have generally trended upwards. The outlook for gold in the future is uncertain, but many experts believe that gold will continue to be a valuable asset.” Investment in SGBs, he says, “completely depends on individual investment goals and risk appetite. SGBs are a good option for investors who want to invest in safe asset, wants to hedge and diversify their portfolio.”
Who Can Invest?
Resident individuals, Hindu Undivided Families (HUFs), and trusts can invest in SGBs. The bonds are issued in denominations of one gram of gold and multiples thereof. The minimum investment is one gram, while the maximum limit is 4 kg per individual.
Govila says “SGBs are suited for long-term investors looking for a safe haven asset and are willing to hold on to their investment for at least five years. ETFs, on the other hand, are more suited for short-term traders who want to take advantage of short-term price movements in the gold market.”
Moreover, if you exit from your SGBs via the stock exchange, the price will depend on the prevailing market price of gold which may be influenced by the trading pattern at that time.
“It is recommended to invest at least 5-10 per cent of your portfolio in gold. However, if you're considering investing in SGBs, you should be comfortable being invested for the long term to use the best benefits of SGBs,” says Govila.
Maturity Period
SGBs have a maturity period of eight years, with the option for early redemption after the fifth year. The redemption price upon maturity or early redemption is calculated based on the average closing price of gold with a 999-purity over the preceding three working days, the India Bullion and Jewellers Association Limited (IBJA) reported.
Should One Invest?
You can redeem the SGBs prematurely only after five years; hence, liquidity could be a concern. Moreover, interest earned on SGBs is taxed, but capital gains tax on redemption has been exempted. Investors can also avail of indexation benefit from long term capital gains arising due to transfer of bonds. SGBs eliminate the storage cost for physical gold or any risk of theft.
As gold prices are relatively stable, the scheme offers a safe investment avenue, especially in times of inflation, global economic uncertainty, and underperforming stock markets. Additionally, SGBs can serve as collateral for loan. While there is a potential risk of capital loss if the gold’s market price drops, the gold units purchased by the investor would still be protected.
However, like any investment, there are pros and cons to investing in SGBs.
Some of the pros include it is a safe haven asset. Gold is considered a safe haven asset since it is issued by the RBI on behalf of the government of India.
There are also no storage or security concerns. SGBs are held in dematerialised form, which means there are no storage or security concerns.
Also, Govila says there are interest rate and maturity benefit. “An investor will get 2.5 per cent interest per annum, payable semi-annually, and maturity is linked with market price of gold. SGBs also offer tax benefits, including exemption from capital gains tax if held until maturity.”
The cons include no guaranteed returns. “The returns on SGBs are not guaranteed, and they depend on the prevailing market price of gold at the time of sale,” says Govila.
In addition, there is a lock-in period of five years, so you cannot exit your investment before then. It is eight years if want the capital gains tax benefit. However, Govila says, it is tradable on stock exchanges if held in demat form.
