Sovereign gold bonds are RBI mandated certificates issued against grams of gold, allowing individuals to invest in gold without the strain of safekeeping their physical asset. Sovereign gold bonds act as a secure investment tool among individuals, as gold prices are less susceptible to market fluctuations. Owing to the popularity and widespread demand for gold, prices of such assets tend to rise significantly over time, a highly prospective investment avenue.
As these bonds are issued by the RBI under Government of India stocks, a particular window is pre-set for subscription, during which a sovereign gold bond scheme is issued in the name of investors in tranches. Generally, the RBI announces issuance of latest sovereign bonds in a press release every 2-3 months, with a one week window during which individuals can subscribe to this scheme.
A holding certificate is issued in the name of an investor upon successful purchase of a sovereign gold bond.
Upon maturity of a sovereign bond, payouts are made corresponding to the prevailing price of gold, calculated by considering a simple average of the price of gold for the last 3 days, and is published by the IBJA. As the price of gold tends to appreciate considerably over time, individuals can enjoy substantial wealth accumulation with minimal risk exposure.
A sovereign gold bond is issued in accordance with the Government Security Act of 2006 by the Reserve Bank of India, on behalf of the central government. Such government backing makes sovereign gold bonds one of the safest forms of investments available in India, as chances of defaults on repayment is zero. Any risk associated with such investments can be attributed to market fluctuations, causing volatility in gold prices.
Sovereign gold bondswere launched under the gold monetisation scheme by the central government in November 2015. The primary aim of such treasury bonds was to reduce the hassles involved with gold investments, as bullions and other physical forms of investments required proper and secure storage.
Investors purchasing a gold bond are issued a holding certificate as a declaration of their investment, thereby acting as proof of the same. Individuals can also choose to digitise such holding certificates to utilise them in their Demat accounts, thus enhancing the security of their investment even further.
Sovereign gold bond returns are substantial as the price of this precious metal tends to rise in the long term. During times of stock market turmoil, investors tend to shift towards gold, as it has the potential to hold its value even during under performance of major functional companies.
Also, as gold is one of the highly demanded precious metals owing to its widespread usage, the market demand tends to be relatively high irrespective of the market variations and global economic scenarios. Hence, unsystematic risks causing erratic movements in the intrinsic value of gold are minimal, allowing investment corpus to grow manifold over time.
As stated above, gold prices demonstrate extensive capital appreciation. Rates of growth of such assets are considerably higher than the prevailing inflation rates a country, vital as an investment avenue. Hence, individuals can enjoy growth in the real value of their investment portfolio, allowing them to accumulate substantial wealth over time.
Sovereign gold bond scheme 2020 comes in with a holding period of 8 years. This is ideal for individuals looking for a long term investment scheme generating extensive capital gains, along with the security of corpus.
Sovereign gold bondsare an acceptable form of collateral to avail loans. Up to 75% of the market value of such bonds can be availed as a loan from any scheduled financial institution, as stipulated by the RBI’s LTV regulations.
Gold prices have an inverse correlation with the stock market, wherein any upturn in stock market returns is generally followed by reduced gold prices. During an economic boom, investors have an optimistic approach towards the stock market, as they expect the companies to perform well in response to surging aggregate demand level. As a result, demand for gold bonds falls, leading to a downtrend in the market prices.
Hence, during the upswing of the business cycle, the gold prices tend to be relatively lower.
Any fluctuation in currency values tends to have an impact on the price at which gold is traded. Appreciation of the US dollar, the benchmark currency, causes gold prices to falter due to higher inflation rates. As the import expenses of a country rise significantly, the total investment level of a country falls, consequently affecting the demand for gold and its prices.
Sovereign gold bond returns can be classified into two types – capital gains earned on the maturity of a bond and interest earnings disbursed semi-annually. Investors holding a bond for the entirety of the term are not required to pay long-term capital gains tax. However, periodical interest income is taxed under ‘Income from other sources,’ and attracts tax rates as per the respective income tax slabs established by the central government.
Individuals opting for resale of a bond in the secondary market have to pay tax on any capital gains realised. Resale before completion of 3 years attracts short term capital gains on total profits, at rates as per the annual income of investors. Long term capital gains, on the other hand, attract tax at 20% of the total earnings, after adjusting the same for indexation.
A sovereign gold bond scheme is one of the most profitable investment avenues, owing to its widespread benefits and low restrictions. Individuals having a low aptitude for risk but want to enjoy substantial returns on their corpus can choose to invest their funds in this scheme, as they are one of the highest returns bearing government-mandated scheme.
Individuals can also diversify their investment portfolio through sovereign gold bonds, which, in turn, compensates for exposure to stock market risks. In the event of the stock market downturn, gold tends to appreciate in value, thereby mitigating the overall risk level of an entire investment portfolio for the investors.
Compared to physical gold investments and gold ETFs, a sovereign gold bond can arguably be more profitable, as it is backed by the highest financial authority. However, purchasing such sovereign bonds should be considered only after analysing the financial goals and time frame of investment, as considerable funds have to be kept locked in to realise subsequent returns in the future. Also, interested individuals need to follow the RBI’s website periodically to for successful subscription to such sovereign gold bonds.