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.
Features of Sovereign Gold Bonds
- Updated price – Prices of a sovereign gold bond 2020 is calculated through a simple average of the closing prices of 999 purity gold for the last 3 days set by the Indian Bullion and Jewellers Association Limited (IBJA).
- Periodic interest pay-outs – A coupon rate of 2.5% per annum is associated with the sovereign gold bond scheme, which is disbursed half-yearly to investors.
- Fixed tenor – Gold bonds are issued for a period of 8 years, with premature withdrawal permissible from the 5th year. Also, individuals can sell their respective securities in the secondary market at the market rate of gold.
- Premature withdrawal – Individuals willing to cash-in their investment can do so after a mandatory holding period of 5 years. This payout benefit can be exercised for the 5th, 6th, and 7th year of bond tenor, and will be processed on the interest disbursement days.
- Resale – The Sovereign gold bond scheme 2020 can be traded in the secondary market after 14 days from an initial subscription date, subject to a notice published by the RBI. Prices at which these bonds are transacted depend on the prevailing gold prices on the stipulated date, as well as its corresponding demand and supply in the stock market. Consequently, for transactions in the stock market, a holding certificate has to be digitised and stored in a Demat account of an investor.
- Quantity of subscription – Subscriptions are to be made in Sovereign bonds as grams of gold. A minimum investment equivalent to the price of 1 gram of gold has to be made, while the maximum limit is equal to the value of 4kg of gold for individuals and Hindu Undivided Families (HUF). For corporations and trusts, the upper limit is set at 20kg.
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.
Advantages of Investing in Sovereign Gold Bonds
- Low risk
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.
- Capital appreciation
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.
- Hedge against inflation
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.
- Long term investment
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.
- Loan facility
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.
Limitations of Gold Bonds
- Inversely Related to the Stock Market
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.
- Susceptible to Currency Fluctuations
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.
Who Should Consider Investing in Sovereign Gold Bonds?
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.