5 factors to consider while investing in Series X Sovereign Gold Bonds

Source : Sify
Author : Finance Desk
Last Updated: Wed, Mar 4th, 2020, 16:30:37hrs
5 factors to consider while investing in Series X Sovereign Gold Bonds

The Series X Sovereign Gold Bond (SGB) Scheme 2019-20 is open for investors to subscribe.  

For investors keen on Gold investments, the SGB schemes offer sovereign promise, liquidity and other benefits.  

The window of investment is open from March 02 – March 06, 2020. The certificate of Bonds will be issued on 11th March 2020.  

In a nutshell: SGB Advantages

Risks and costs of storage are eliminated.  

No issues related to making charges, melting charges, wastage charges, purity compared to jewellery.

Held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.

No STT or Capital Gains Tax (as per Government of India guidelines)

The bonds can be used as collateral for loans.

Here are key factors, investors should know before subscribing to the Sovereign Gold Bond.  

#1 Understanding SGB as a Financial Product?

Sovereign Gold Bonds are a financial product floated by the Government of India and the Reserve Bank of India. These bonds offer Sovereign guarantee hence there is no default risk.  

Each SGB is offered as one gram of physical Gold. SGBs can be owned in both paper and demat form.

For investors, SGBs are avenues that offer a regular interest pay-out in addition to Gold (proportionate to investment size) on maturity. The bonds have a life of 8 years, and can be used as a collateral for loans. The RBI, however, clearly says that the loan against SGBs would be subject to decision of the lending bank/institution, and cannot be inferred as a matter of right by the SGB holder.

For investors keen to deposit X amount of money on a long-term, SGBs are an interesting and nuanced investment approach in comparison with bullion or Gold jewellery.  

Individual and HUF (Hindu Undivided Families) investors can invest up to 4 kilograms (4,000 units) while trusts can invest up to 20kgs (20,000 units) per fiscal year (April-March).

The bonds are repayable on the expiration of eight years from the date of issue of the Bonds. Pre-mature redemption of the Bond is permitted after fifth year of the date of issue of the Bonds and such repayments shall be made on the next interest payment date."

#2: What does it cost?

The bond is valued at Rs 4,260 per unit. This is the per gram rate of Gold decided by the RBI in consultation with the Indian Bullion Jewellers Association. This is the market rate evaluated for 999 purity Gold rate by IBJA between February 26-28, 2020.  

In case one opts for digital payments, a discount of Rs 50 per unit can be availed. The RBI says that in consultation with the GoI, a discount of Rs 50 per gram will be offered for digital applications and payments. "For such investors, the issue price of Gold Bond will be Rs 4,210 (Rupees Four Thousand Two Hundred and Ten only) per gram of gold," says the RBI.

#3: What am I getting?

Gold in jewelry and bullion form earns nothing except for value appreciation whenever gold-rates rise. There is a cost of safe-keeping and maintenance. Gold in ETFs may give you returns but not all offer a periodic interest. Also, ETFs deduct caital gains tax if held beyond three years.  

Brokerage firm HDFC securities in a report comparing Gold ETF with SGB said credit risk in Gold ETF was minimal although there were charges such as "TER (Total Expenses Ratio) from the total assets. This expense ratio ranges from 0.35% - 1.14% per annum of the total assets."

SGB offers 2.50 percent interest per annum from the date of issue on nominal value. Interests are paid half-yearly and the last interest is paid along with principal on maturity.  

So, an investment of one unit of SGB could offer an interest of Rs 105.25 per annum paid in two instalments - half yearly. Meanwhile, Gold bullion stocked at home earns nothing.  

An SGB can also be sold on a secondary market such as BSE/NSE, but one will have to evaluate the price-risk (availability of buyers) and also factor in how capital gains are evaluated in demat form.  

#4 What about tax benefits?

Yes there's some form of benefit - capital gains on SGBs are exempted. There is a tax on interest earned on bonds as per provisions of Income-tax Act, 1961 (43 of 1961).  

RBI says indexation benefits will be provided to long term capital gains arising to any person on transfer of bond.

#5: Are there any other benefits? Can I trade them?

Tradeability is permitted on the basis of dates prescribed by the RBI. Similar to a share certificate, the SGBs can be transferred too.  

The RBI says, "The Bonds issued in the form of Stock Certificate shall be transferable by execution of an Instrument of transfer as in Form ‘F’, in accordance with the provisions of the Government Securities Act, 2006 (38 of 2006) and the Government Securities Regulations, 2007, published in part III, Section 4 of the Gazette of India dated December 1, 2007."

HDFC Commodities in its report, adds, "Liquidity is available from secondary markets as these bonds are mandated to be listed on BSE and NSE. However, the liquidity of the past issues are quite low and restricted only to few tranches. Most of the past series of SGBs are trading at a discount to the gold prices due to lack of liquidity and depth in the market."

Gold markets have witnessed significant volatility in the past two months. In January, the US-Iran tensions and the ongoing concerns over Coronavirus that began in February are immediate reasons for the volatility. Several analysts, including a Motilal Oswal Brokerage report suggest that Gold could touch levels of Rs 47,000 - 48,000. Investing in the markets may be a volatile decision, but investing 5-10 percent in the Sovereign Gold Bonds can lead one to some Gold-backed investments.  

Some Numbers & Statistics:

Comparison between SGB, Physical Gold and ETF. Source: HDFC Securities.  

Previous SGB issues. Source: HDFC Securities

Who to contact to invest in SGB:

The authorized agencies for subscription are Scheduled Commercial Bank (excluding RRBs, Small Finance Banks and Payment Banks), designated Post Offices (as may be notified), Stock Holding Corporation of India Ltd (SHCIL) and recognized stock exchanges such as National Stock Exchange of India Limited and Bombay Stock Exchange Ltd. You can also try for more invest information with your brokerage firm.  

For more information on how to invest you should contact a bank or a brokerage firm. More FAQs are available on the RBI site, click here to view it.