SGB vs PPF

Gold is undoubtedly one of the most cherished possessions among Indians. There is a large category of people who love to hoard gold and have been doing so habitually since they walked into their work-lives. On any pretext ranging from gifting, birth in the family, the marriage of a loved one or religious festivals, they would buy gold ornaments, coins and bars and take pride in it. However, they fail to realise that hoarding gold, though maybe ‘food for the soul’; is not a real investment as it fails to earn any income, interest or dividend till such time they are sold in the market or pawned to tide over some unforeseen financial crisis. Moreover gold has earned itself a sentimental value among Indians unlike the rest of the world. Thus selling gold for income or as a source of money does not occur easily to us Indians.

Options to invest in Gold:

However, there are other alternate options to invest in gold that can earn returns and contribute to wealth creation for people. These days gold is available in both its physical forms and as papers as well. Physical forms include ornaments, bars, coins and artefacts of various shapes and sizes. Paper or dematerialised forms of investments range from Sovereign Gold Bonds (SGBs) to Exchange Traded Funds (ETFs) to Gold Mutual Funds that actually invest in ETFs for their returns.

If the desire is to invest in a tool that is safe, liquid and gives returns in the real sense as well, then one should ideally look at investing in tools like Sovereign Gold Bonds or Public Provident Funds (PPF). Let us assess these tools to make a conscious decision to choose the right tool.

Sovereign Gold Bonds as an investment option:

Sovereign Gold Bonds are a simple yet better alternative to investment in gold and are done in paper form. It is denominated in grams of gold. So the minimum investment required is in just 1 gm of gold and it’s multiple thereafter. As an individual, one can purchase 4kgs of SGBs in a financial year. There is no need to have a demat account to buy SGBs, though trading in SGBs in the secondary market is possible only through demat accounts. Joint account holding of the bonds and nomination is allowed in SGBs.

SGBs are issued by the Reserve Bank of India in consensus with GOI. They are sold by opening weekly windows every 2 to 3 months. Investors need to keep a watch and invest in these bonds at an issue price per gm of gold. In case one wants to make a purchase at any other time, they may do so from the secondary market. The price, in that case, will be the market price of the SGB at that time.

Distribution points of SGBs

SGBs are made available to the public from an array of distribution points viz.

• They are the Nationalised Banks,
• Selected Private Sector Banks and Nationalised Banks,
• Selected post offices,
• Stock Holding Corporation of India Ltd. (SHCIL), and
• Designated stock exchanges either directly or via authorised agents.

Pros of investing in Sovereign Gold Bonds or SGBs:

1. Bond term and interest rate: The bonds come with a term of 8 years. They have an assured annual interest rate of 2.5% paid half-yearly. The last 6 months interest is paid with the maturity amount. In case an investor wishes to redeem the bond before maturity, the then market price of the bond would apply.
2. Hassle-free storage of bond: Storage of the SGB papers is hassle-free as it is stored in the Demat form. Thus it has no risk of loss of gold value involved in ascertaining the purity of gold jewellery or its ‘making charges’. Unlike PPF, there is no passbook to be maintained. This minimises the fear of losing records of investment.
3. Who can buy SGBs and their limits?
   Anyone can buy SGBs. The maximum amount of SGBs that an individual can buy in any financial year is limited to 4 kgs of gold. The minimum investment denomination allowed being in 1 gm of gold. The maximum that HUF can invest is 4 kgs too. However, trust can invest in 20kgs.
4. Gain on online purchase:
   There is a benefit if the SGBs are bought online. In that case, an investor saves INR 50 per gram on its nominal value.
5. SGBs can be used as collaterals:
   Financial institutions accept SGBs as collaterals against loan proceeds. ‘Loan to value’ ratios stipulated by RBI act as guidelines in case of such proceeds.
6. Tax benefit:
   Capital gains from SGBs are exempted from tax. For non-individual investors, indexation benefit is also available if it is transferred before maturity. Interest amount, however, is taxable in the hands of the investor.

Cons of investing in SGB:

1. Risk of investment:
   Market value of SGBs is directly related to the fluctuation in gold prices. Thus if the gold price falls, there is likely to be capital erosion in SGBs, though a total number of units purchased remains intact.
2. Lock-in period:
   The bonds have a lock-in period of 5 years from the bond issuance date. That means one can look at trading in the secondary market or opt for pre-mature redemption from the 6th year onwards.

An investor may have to settle for a different redemption price of the SGBs as compared to the existing market value at the time of redemption of the bonds. This is because of the inherent nature of the calculation of the redemption price of the bonds.

Public Provident Funds as an investment option

Public Provident Funds (PPF) is one of the most sought after investment options in India among young and old. The primary reason for this is because of its high-interest rate and tax benefits. In fact among all known debt instruments involving small savings and their fixed interest rates, the interest rate of PPF is the highest till date. Traditionally for the middle class, PPF accounts have been opened by parents in the names of their children when they were very young and handed over to the latter when they started making their own living. This was a way in which parents imbibed in children the habit of savings and the importance of doing so.

Pros of investing in PPF:

1. Tenure of investment:
An investment in PPF matures in 15 years. On maturity, one can withdraw the entire maturity amount with interest and close the account. However, if the investor so desires, he/ she can extend the term for five years with or without further payment. In case the investor chooses the option to continue the account without further investment, even then his invested amount will keep earning the interest indefinitely till further intimation from his end at the end of the extended term(s) of the block of 5 years.

2. Interest Assured:
The current rate of interest is 7.10% which is compounded annually and is the highest available in the small savings segment. This rate of interest is assured but not fixed under any circumstance. The rate of interest in PPF is connected to the 10-year-old GOI bond yield that may change from time to time.

3. Liquidity available:
A PPF account ensures that it gives enough liquidity to the investor to take care of his/ her financial exigencies. It allows for partial withdrawal from the 6th year onwards up to 50% of the balance available at the end of 4th year or the immediately preceding year, whichever is lower. Only one such withdrawal is allowed in a financial year.

Withdrawals are not allowed before the account has completed 5 years. Still, adequate liquidity is made available in the form of loan in lieu of 25% of the balance in the account at the last financial year. The rate of interest for such a loan is just 1%. The loan is expected to be repaid within 3 years from the date of borrowing. Fresh loans can be availed only post the earlier loan has been completely repaid.

4. Cap in investment:
A PPF account can be maintained with just INR 500 of investment a year (else account becomes dormant). The maximum investment allowed in a financial year is INR 1,50,000. In case anyone invests more than INR 1.5Lacs in an FY, that portion of the investment does not earn any interest. Thus investors beware. A separate investment in the name of spouse or child is allowed with a similar amount and tax benefits can be availed on the second account as well.

5. Tax Benefit of PPF (Exempt- Exempt-Exempt):
Investment in a PPF is full of tax benefits as listed below –

• Investment of up to INR 150000 in a fiscal year is exempt from tax u/s 80C
• Interest earned on the PPF is tax-free though must be shown in the IT returns
• Partial withdrawals are tax exempt
• Maturity amount from a PPF account is exempt from tax
• Separate PPF account maintained in the name of spouse/ child enjoys all of the above tax exemptions as well

Cons of investing in PPF:

1. Account-holders beware:
   Contribution(s) in a PPF account should be made before the 5th of any month for the invested capital for the month to earn interest. This is because, if the contribution is made from 6th to the end of the month, the money invested is like an interest-free loan to the government as it does not earn any interest that month anymore! Thus one needs to ensure that the amount is credited to the PPF account by 5th of any month as desired.
2. Restricted Investors:
   Only citizens of India can invest in PPF in their individual capacity. One person is entitled to open and maintain only one account. NRIs, Trusts or HUFs are not permitted to open a PPF by law.
3. PPF account as collateral:
   The balance in a PPF account cannot be pledged/ used to pay off debts under any circumstance. Even a court order cannot force such payment to be made by anyone.

Thus while both SGBs and PPF accounts have their own strengths, they have their weaknesses too. Depending on the investment objectives, investors must wisely choose their investment tools to ensure they have a diversified portfolio to tide over inflation and market vulnerability and ensure maximum returns on investments to make their financial goals a reality.