Sovereign Gold Bonds

 

 WHAT IS SOVEREIGN GOLD BONDS (SGB)? 

This is one of the best ways of investing in gold. With this, investors can benefit from an increase in the value of gold prices and at the same time, can earn a fixed interest of 2.5% per annum on it too.

Interest is credited every 6 months to the bank account of the investor and the last interest becomes payable on maturity along with the principal.

These bonds are government securities that are issued by Reserve Bank on behalf of the Government of India and substitutes for holding either physical gold or gold in Demat form.

Gold being a highly volatile commodity involves a high risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold that he has paid for.

 

 

IMPORTANT POINTS TO NOTE ABOUT SOVEREIGN GOLD BONDS (SGB)

The following are some of the important features of the SOVEREIGN GOLD BONDS (SGB) that every investor must know.

1. Investor’s profile – It is best suited to investors who want to invest in gold, can stay invested for a minimum of 5 years and have very high-risk appetite to be able to digest even loss of principal.

 

2. Risk – Gold bonds are considered as a high risk-high returns investment since gold as an asset class is highly volatile. Sometimes, it can also result in negative returns or risk of principal loss.

 

3. Liquidity – Gold bonds are considered low on liquidity as the amount invested is locked until 5 years and can only be liquidated on maturity. However, accessing funds during emergencies is possible as they are listed on the stock exchange and can be sold in the secondary market for which investors need to find a buyer.

 

4. Taxation – Income earned from sovereign gold bonds is considered as “Income from capital gains” and is given a special status to be exempted from tax if held until maturity. If redeemed prematurely or sold in the secondary market after 36 months, then long term debt taxation will be applicable with indexation benefits. On the other hand, interest earned out of such bonds is treated as interest income and taxed as per applicable tax slab. Such bonds do not provide tax benefits.

 

5. Volatile – Returns from gold are market-linked which makes them highly volatile.

 

6. Time horizon – Sovereign gold bonds (SGB) has a maturity period of 8 years and a lock-in of 5 years. Hence, it is suitable for long term investors having an investment horizon of 8 years or more.

 

7. Regular Income – These Bonds offer regular income in the form of interest @ 2.75% per annum which is paid every 6 months.

 

8. Returns – Since it is market-linked, its returns are not fixed and are linked directly to the price of gold.

 

9. Asset class – Gold bonds are a substitute for holding physical gold.

 

10. Cost – Since these bonds are issued by Government on India, they do not involve the cost of investment.

 

11. Loan facility – “Sovereign Gold Bonds” can be used as collateral for loans. The loan-to-value (LTV) ratio is set in the range of 35% to 50% and the value of the loan can be in the range of Rs. 20,000/- to Rs. 20,00,000/-.

 

 

WHO CAN INVEST IN SOVEREIGN GOLD BONDS (SGB)?

Only resident Indians as defined under the Foreign Exchange Management Act, 1999 including HUF, trusts, charitable institutions and similar entities notified by the government from time to time can invest in this scheme.

Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity.

 

 

MINIMUM AND MAXIMUM INVESTMENT ALLOWED IN SOVEREIGN GOLD BONDS (SGB)

Entities	Minimum	Maximum
Individuals	1 Gram	4 kg
HUFs	1 Gram	4 kg
Trusts	1 Gram	20 kg

 

Minimum of 1 gram and a maximum of 4 kg for individuals where the limit is applicable for each member of the family, up to 4 kg for Hindu Undivided Family (HUF) and up to 20 kg for trusts and similar entities notified by the government from time to time. This limit is set for each fiscal year.

In case of joint holding, the limit applies to the first applicant. The annual ceiling will include bonds subscribed

under different tranches during initial issuance by Government and those purchased from the secondary market.

The ceiling on investment will not include the holdings as collateral by banks and other Financial Institutions.

 

 

WHERE DOES SOVEREIGN GOLD BONDS (SGB) INVEST YOUR MONEY?

SOVEREIGN GOLD BONDS (SGB) are government securities denominated in grams of gold. They are substitutes for holding physical gold. The bonds are issued by the Government of India and the prices of bonds are linked directly to the gold prices in India.

 

 

WHAT KIND OF RETURNS CAN SOVEREIGN GOLD BONDS (SGB) GENERATE?

SOVEREIGN GOLD BOND (SGB) investors earn 2 types of income.

• Appreciation in the price of gold.
• Quarterly interest payouts.

It can be purchased in Indian Rupees based on a simple average of the closing price of gold of 999 purity.

Unlike physical gold or gold ETFs, SGBs also earn interest on the investment made.

The future value of gold cannot be predetermined however, the government has a fixed interest of 2.50% per annum (till tranche 5, it was 2.75%) on the investment, payable half-yearly. This is a direct and assured benefit given to all investors of SGBs.

Gold has generated the average returns of approximately 9% in the last 10 years.

Assuming, you invest Rs. 10,000/- per month in gold until retirement (60 years) @ average rate of 9% per annum, the corpus you will create (approximately) on your retirement i.e. at the age of 60 at various age groups will be as follows:

Investment start age	Corpus on retirement
20 Years	₹ 4,24,96,485/-
25 Years	₹ 2,71,30,586/-
30 Years	₹ 1,71,43,806/-
35 Years	₹ 1,06,53,085/-
40 Years	₹ 64,34,561/-
45 Years	₹ 36,92,810/-
50 Years	₹ 19,10,860/-

                                                                                             

Please note, that the interest declared on “GOLD SOVEREIGN BONDS” will be paid over and above the capital gains earned on appreciation of gold.

HISTORICAL RETURNS GENERATED BY GOLD IN THE LAST 10 YEARS IN COMPARISON TO SENSEX

	Returns %
Year	Gold	Sensex
2019	24.10%	14.10%
2018	7.50%	5.90%
2017	5.20%	27.50%
2016	11.50%	2.00%
2015	-6.20%	-5.00%
2014	-8.20%	29.60%
2013	-4.90%	8.50%
2012	12.10%	25.10%
2011	31.70%	-25.10%
2010	23.60%	17.40%

 

 

FUND ACCESSIBILITY AND LOCK-IN APPLICABLE FOR SOVEREIGN GOLD BONDS (SGB)

Each tranche of SGBs has an eight-year tenure and every issue has a lock-in of five years.

In case of premature redemption, investors can approach the concerned bank/SHCIL offices/Post Office/agent 30 days before the coupon payment date.

Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date. The proceeds will be credited to the customer’s bank account provided at the time of applying for the bond.

These bonds are also tradable on Exchanges, if held in Demat form. It can also be transferred to any other eligible investor.

 

LOAN AGAINST SOVEREIGN GOLD BONDS (SGB)

“Sovereign Gold Bonds” can be used as collateral for loans. The loan-to-value (LTV) ratio is set in the range of 35% to 50% and the value of the loan can be in the range of Rs. 20,000/- to Rs. 20,00,000/-.

The loans are available in the form of term loan or demand loan and loan overdraft facility.

In case of term loan or demand loan, the entire loan amount in full is transferred to the investor’s account with the maximum tenure of 1 year whereas an overdraft facility is given for the maximum period of 3 years.

The borrower needs to service the interest every month and the principal is repaid at the end of the tenure.

 

 

WHAT ARE THE BENEFITS OF INVESTING IN SOVEREIGN GOLD BONDS (SGB)?

SOVEREIGN GOLD BONDS (SGB) offers the following benefits to its investors.

1. Hedge against inflation – Gold is known to have a direct relationship with inflation. It means that the price of gold also increases with a rise in inflation. Hence, gold helps generate inflation-adjusted returns in the long run.

 

2. RBI regulated – Sovereign gold bonds (SGB) are government securities that are issued by RBI on behalf of the government of India. Hence, it is regulated, more structured and safer than other forms of gold investments.

 

3. Lower Cost - The biggest advantage is on the cost front when compared with buying physical gold in the form of jewelry. The making charge of 20 -25% is not applicable in the case of sovereign gold bonds.

Even gold ETF involves an expense ratio (fund management cost) of about 1% plus Demat charges. However, there's no cost involved and no charges of any nature applicable to buying SGBs.

Even the purchase price is the average of the gold prices of the previous week and if bought online and paid digitally, a further discount of Rs 50 per gram is allowed.

 

4. Tax benefit - Earnings from the sale of SGB if held until maturity are exempt from tax and if sold before maturity after 3 years are treated as income from capital gains with indexation benefits. This reduces tax liability to a greater extent.

 

5. No TDS – Interest earned from SGB is not subject to TDS.

 

6. Extra returns – Lower cost adds to the returns it generates from the sale of units. Investors are also assured of fixed returns in the form of interest that they earn on the investment.

 

7. Easy access to funds during hard times – Though it involves a lock-in until maturity, it can be redeemed prematurely as it is traded in a stock exchange. Also, loans can be availed against the units purchased. And if held until maturity, it keeps earning fixed interest along with capital appreciation.

 

8. Easy to maintain – Gold in paper form is easy to maintain and does not run a risk of damage or theft, unlike physical gold.

 

 

WHAT ARE THE LIMITATIONS OF INVESTING IN SOVEREIGN GOLD BONDS (SGB)?

SOVEREIGN GOLD BONDS (SGB) has the following limitations.

1. Highly volatile – Gold as an asset class is highly volatile which makes it a risky investment if not diversified. It is also highly illiquid when the market is unfavorable.

 

2. Risky – Its volatility makes it so risky that investors are exposed to a risk of losing their principal.

 

3. No regular income – Despite having a lock-in of 5 years, it fails to generate regular income. Though investors earn fixed interest, they only get paid once every 6 months.

 

4. Low Liquidity – SGB is issued for a pre-defined period and it cannot be liquidated until maturity. Though they are listed on a stock exchange, they are very thinly traded and thus difficult to liquidate.

 

5. No guaranteed returns – Since the performance of gold is market-linked, its returns are not guaranteed and are unpredictable in the long run.

 

 

WHO SHOULD CONSIDER INVESTING IN SOVEREIGN GOLD BONDS (SGB)?

SOVEREIGN GOLD BONDS (SGB) is most suited to the following investors:

1. Gold Lovers – Gold investors must opt for this product as it is not only a safer and more secure way to invest in gold but also more cost-effective. It also earns a fixed interest of 2.5% per annum.

 

2. Risk-takers - Young investors especially below 35 years of age, who have age by their side and can take higher risk and can stay invested for a longer term can consider investing in sovereign gold bonds (SGB).

 

3. Investors looking forward to diversifying their portfolio – Investors with low liquidity needs, have enough exposure to equities and debt instruments and looking forward to diversifying their portfolio and earn inflation-adjusted returns must consider investing in this option.

 

 

WHO SHOULD AVOID INVESTING IN SOVEREIGN GOLD BONDS (SGB)?

SOVEREIGN GOLD BONDS (SGB) may not be the best investment for the following investors:

1. Investors with high liquidity needs – Gold as an asset class is highly volatile and frequent withdrawal at regular intervals is not possible. Hence investors with high liquidity needs should avoid investing in this scheme.

 

2. Conservative investors – Gold is highly volatile and so risky that investors may end up losing their principal. Hence, investors with low-risk appetite should refrain from investing in it.

 

 

A PIECE OF ADVICE

THINGS YOU SHOULD DO WHILE INVESTING IN SOVEREIGN GOLD BONDS (SGB)

SOVEREIGN GOLD BONDS (SGB) investors must follow the below suggestions while investing to maximize the value of their investment.

1. Perform due diligence – Investors should be aware of all pros and cons of the investment they are getting into. The amount required on maturity, liquidity needs, risks involved, etc. should be carefully assessed before signing up for this scheme. Also, there are various ways of investing in gold like buying ornaments and gold coins, gold ETF etc. hence, the option that works best for you should be evaluated.

 

2. Assess your risk appetite – One should always assess their risk appetite before investing in gold. Gold is considered as a high risk – high return investment. And someone with moderate income, sole bread earner of the family, low on savings, high on liabilities tend to have a very low-risk appetite as even a minor loss may derail their entire financial life. Such individuals should be very careful while investing in this option.

 

3. Know your investment goal – One should do a careful evaluation of their investment objective while choosing investment products. Investment in gold is mainly meant for long term financial goals having a horizon of 5+ years.

 

4. Understand its risk-reward relationship – Gold is a commodity whose performance is market-linked. Though it is known for generating inflation-adjusted returns, its returns are not guaranteed. In the worst cases, investors have even lost their principal. Hence, it should only be used as an option to diversify your investment portfolio.

 

5. Always diversify – Never put all eggs in one basket. The safest way of investing is to diversify your investment across various asset classes as the fall of one asset class sometimes leads to the rise of others. Concentration on one particular asset class can be very risky and may result in loss of capital. Similarly, refrain from over diversifying the portfolio as it may dilute your overall gains.

 

6. Take online route for investing – The issue price of the Gold Bonds will be ₹ 50 per gram less than the prevailing value for investors applying online and the payment against the application is made through digital mode.

 

7. Update nomination details – Updating nominee details at the time of making an application is very important. In case of an investor’s death, the family members should not end up running from pillar to post when they need that money the most to claim your investment proceeds.

 

 

THINGS YOU SHOULD AVOID DOING WHILE INVESTING IN SOVEREIGN GOLD BONDS (SGB)

SOVEREIGN GOLD BONDS (SGB) investors must avoid indulging in following practices while investing to protect their investment from losing its value.

1. Going heavy on this asset class – Gold is a highly volatile asset hence, exposure of anything over 10% of the total investment portfolio may put you at high risk of low or negative returns.

 

2. Breaking it prematurely – It should be noted that if sovereign gold bonds (SGB) is held for the complete term, its redemption proceeds will be exempt from capital gains tax. However, if these bonds are sold in the secondary market before maturity, capital gains arising out of such transactions will be taxed at 20% with indexation, if sold on or after 3 years, or would be subject to marginal tax rate as per applicable tax slab if sold before 3 years.

Hence, staying invested until maturity can generate better post-tax returns.

 

3. You can foresee the need for funds before maturity and still investing – Sovereign gold bonds (SGB) has a lock-in of 5 years. Hence, anyone looking forward to liquidating their investment before maturity may not be able to do so. The only way out is to sell their investment in the secondary market for which they need to find a buyer.

 

4. Borrowing money to invest – A lot of brokers or agents will lure you with attractive returns however, one should understand the risk involved in Gold.

How much ever promising the investment looks, one must be very careful about fundraising methods. Never borrow money to invest in risky options as a minor miscalculation can lead to heavy losses where all your money can vanish if the investment fails.

 

5. Do not get influenced by anyone but financial experts – A confused investor always has a tendency of reaching out to their friends and relatives for suggestions while making critical investment decisions. That happens irrespective of the knowledge and the level of understanding the friend has about the domain. It is as good as asking a truck driver, how to fly an airplane. Such advices in most cases are based on their individual experiences and hardly on calculations or facts and figures. Hence, instead of blindly following the financial advice of a random friend, investors must act wisely and take assistance of a well qualified financial planner who has sound knowledge about the domain.

 

 

WHAT ARE THE RISKS INVOLVED IN SOVEREIGN GOLD BONDS (SGB)?

SOVEREIGN GOLD BONDS (SGB) investors should be mindful of following risks involved in this investment:

• Liquidity Risk – Sovereign gold bonds (SGB) can only be liquidated at the time of maturity. And in case someone needs to liquidate it before maturity, they need to sell it in the secondary market. Hence, anyone looking forward to liquidating their investment before maturity may or may not be able to do so.

 

• Market Risk – The performance of gold is largely driven by various market forces like the international price of gold, dollar rate, demand for gold in the domestic market, local taxes, etc. which makes this asset class highly volatile and risky including the risk of principal loss. 

 

• Concentration risk – Returns from SGB is solely determined by the future value of gold due to which the fate of investors is largely dependant on the performance of one particular commodity. This increases their exposure to risk due to over-concentration on a single asset class.

 

Limiting the exposure to gold to 10% of the total investment portfolio and diversifying investment across can help investors mitigate risk and also earn decent returns.

 

 

COMPARISON WITH PHYSICAL GOLD AND GOLD ETFs

Particulars	Sovereign Gold Bond	Gold ETF	Physical Gold
Interest Payment	2.5% per annum	NA	NA
Safety	Paper form hence safe	Paper form hence safe	Risk of theft/wear & tear
Purity	High	High	Purity is questionable
Capital Gains Tax	Exempt after maturity	Applicable	Applicable
Loans available	Yes	No	No
Liquidity	Low	High	High
Storage Convenience	High	High	Low

 

 

TAXATION RULES FOR SOVEREIGN GOLD BONDS (SGB)

SOVEREIGN GOLD BONDS (SGB) provides 2 types of income to its investors.

• Income from capital gains.
• Interest income.

Earnings from the sale or transfer of SGB are treated as income from capital gains hence it falls under the debt taxation.

As per the 2016-17 budget, if SGB is held for the complete term, the redemption of SGBs will be exempt from capital gains tax. However, if these bonds are sold in the secondary market before maturity, capital gains arising out of such transactions will be taxed at 20% with indexation if sold on or after 3 years or would be subject to marginal tax rate as per the applicable tax slab if sold before 3 years.

While the income earned in interest payout will be added to the total taxable income and taxed as per the applicable tax slab.

 

 

HOW TO INVEST AND DOCUMENTS NEEDED

The sovereign gold bonds will be sold through nationalized banks like State Bank of India and scheduled private banks, Stock Holding Corporation of India (SHCIL), designated post offices and the National Stock Exchange of India and the Bombay Stock Exchange, which would allow early exit.

The application form can also be downloaded from the RBI’s website under this link chrome-extension –//gphandlahdpffmccakmbngmbjnjiiahp/https –//rbidocs.rbi.org.in/rdocs/content/pdfs/INS181213AF.pdf.

Payment for the bonds will be through cash payment (up to a maximum of Rs 20,000) or demand draft or cheque or electronic banking.

The issue price of the Gold Bonds will be ₹ 50 per gram less than the nominal value to those investors applying online and the payment against the application is made through digital mode.

The bond can be gifted/transferable to a relative/friend/anybody who fulfills the eligibility criteria. The limit criteria should meet too.