October SGB: Why and why not to invest in legally Cheaper Gold ahead of Navaratri

Source :Sify
Author :Finance Desk
Last Updated: Mon, Oct 12th, 2020, 13:12:43hrs
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The Navaratri season is around. And, if you are keen on buying Gold, the Reserve Bank of India's seventh SGB scheme should be considered.

The RBI's Series VII 2020-21 series is open to subscribers from Monday and investors can subscribe to these bonds at a price of Rs 5,051 per gram.

For digital investors, the cost works out to Rs 5,001 per gram thanks to a Rs 50 discount for digital transactions.

At this price, the October SGB is lower than the one launched in September (Rs 5,117). Now that you know the price, its better to understand the investment and the policy.

The Sovereign Gold Bond is almost similar to investing in Gold although there exists few differences.

First, the quoted price of Gold is authentic. When investing in physical Gold, getting the accurate price can be a frustrating impediment. There is the element of making charges, refining margins, wastage chargest etc. With SGB, there's none of those confusing parameters. Also, the price discovery mechanism is taken care of by the centuries old India Bullion Jewellers Association. Hence, one is assured of authentic market rates.

Secondly, there is a great angle of credibility. The subscription system involves commercial banks, exchange houses, post offices and the entire system is regulated by the Reserve Bank of India. The RBI's SGB exercise is well regulated and conducted on behalf of the Government of India.

Third, in terms of benefits, you will find tax benefits for subscribing to an SGB as opposed to Gold which may not offer any dividends or interest benefits.

The 2.5 percent annual interest rate on nominal value is paid in two instalments by the government. If the investment amount is large, a significant return can be expected every year.

However, for the benefits mentioned above, there are a few disadvantages too. First, you are investing in a Gold backed scheme which is not Gold or Gold jewellery per se. In other words you will not be owning real Gold. Hence, if your idea of subscribing to an SGB is to see physical gold in your hands, then this is not the plan for you. You can redeem Gold at a later stage with the SGB, but its not as straight-forward as investing in a jewellers' scheme or buying physical Gold.

Second disadvantage that you should know is the factor of immediate convertability. Physical Gold can be sold or exchanged for money at a jeweller or a bank or anywhere in 190 countries across the world. In fact Gold is commonly exchanged at several kiosks at airports and even communities. Exchanging SGB for money is not straight-forward.

SGB fetches what the secondary markets determine. The secondary markets such as BSE or NSE are avenues for trading of such bonds. The secondary price of such bonds is reportedly lower than what the primary subscription was. For example, if the cost of an SGB (subscribed in primary transaction) was Rs 4,800, the secondary price could be Rs 4,700. You could always head to the BSE or NSE website and check the market-price for SGBs. Investment in SGB works well for those investors who are keen to hold for a long time. At least for five years or more.

Now that you know the pros and cons, here are some benefits:

1. Cost of storage is eliminated. Held in demat format.

2. No melting charges, making charges, purity testing charges, BIS/hallmarking charges etc.

3. No STT or capital gains tax.

4. Bonds can be used as collateral for loans. You will get 90% LTV for physical gold as well, however the value of loan is subject to assessment.

5. Tenure of SGB: 8 years, interest eligibility is 2.50 percent.

6. Premature exit: Permitted at end of fifth year.

The retail price of 24 Karat Gold as of Monday (according to Sify) works out to Rs 5,125 whereas an investment in RBI's Sovereign Gold Bond scheme helps an average investor join Gold investment at Rs 5,001 (should you take the Rs 50 discount).

If that interests you, do head to the nearest scheduled commercial bank broking agency or exchange to subscribe to the newest bonds.

Individual buyers can subscribe for 4 kilos of Gold or 4,000 SGB instruments in a fiscal. For Hindu Undivided family, the restriction is 4 kilos while trusts can subscribe up to 20 kilos. The fiscal year is April - March.

Since November 2015, the RBI raised Rs 9,652.78 crores via SGBs. Investors have subscribed to 30.98 tonnes of Gold.

In 2019-20, RBI announced 10 SGB schemes which saw investors subscribe to 6.13 tonnes of Gold investing Rs 2,316.37 crores.

Disclaimer: In this photograph taken in July 31, 2020, a security guard sits at the entrance of a cash for gold shop in New Delhi. As gold's value skyrockets, jewellers in India, traditionally one of the world's hottest markets, are struggling -- with shops shut, sales down and craftsmen staying home due to coronavirus fears. The image is attributed to Xavier Galian for AFP. Sify is subscribed to AFP.