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Sovereign Gold Bonds are now much more lucrative

LiveMint logoLiveMint 01-08-2017 Ashwini Kumar Sharma

A few revisions in the guidelines to the Sovereign Gold Bonds (SGB) have been approved by the Union cabinet chaired by Prime Minister Narendra Modi on 26 July 2017. The revision have been made to make the scheme more attractive to investors and achieve its intended objectives. The most important change is raising the investment cap of the scheme eight fold to 4 kg in a financial year per person from 500 gram. We tell you about the SGB scheme and what changes have been introduced.

The SGB scheme was launched in 2015 with the aim to curb the demand for physical gold, by replacing it with alternate investment options in form of paper or electronic investments. The intention was to mobilise finances and reduce the economic strain caused by imports of physical gold and reduce the Current Account Deficit (CAD).

Under the scheme, investors were offered bonds, where each bond was equivalent to 1 gram of gold. The minimum investment was kept at 2 gram (reduced to 1 gram in the subsequent issue), with a maximum limit of subscription of 500 gram per person per fiscal year (April-March). Price of the bonds has to be fixed in Indian rupees on the basis of the previous week’s (Monday-Friday) simple average closing price for gold of .999 purity, published by the India Bullion and Jewellers Association Ltd. (IBJA). In the initial issues, SGB was offering 2.75% of interest per annum over and above the increase in price of gold. In subsequent issue, interest rate on SGB was brought down to 2.5% per annum.

The additional benefit was provided with a target to mobilise Rs15,000 crore in 2015-16 and at Rs10,000 crore in 2016-17 under the scheme. However, the amount so far raised by it is Rs4,769 crore. The changes have been made considering low traction of the scheme.

Now individuals and Hindu Undivided Families (HUFs) will be able to buy up to 4 kg of gold under the scheme, whereas a Trust will be able to buy up to 20 kg of gold in a fiscal. Besides increasing the investment limit, government plans to design and introduce variants of SGBs with different interest rates and risk protection or pay-offs, to serve different categories of investors.

The ministry, after consultation with the National Stock Exchange, Bombay Stock Exchange, banks and Department of Post; is also planning to make SGBs available ‘on tap’, which means it may be offered throughout the year, and not in tranche for limited periods.

Compared to its peers, the scheme lacks liquidity as its maturity period is 8 years. The ministry will also work on improving the liquidity and tradability of SGBs. And to motivate agents, it may also allow higher commissions.

If you intend to buy gold for investment, SGB is certainly a better option compared to physical gold or even exchange traded fund (ETFs). Transaction charges in physical gold like jewellery can go as high as 25-30%, whereas in case of bars and gold coins, it can be as high as 13-15%. Even in case of ETFs, expense ratio can vary between 0.9% and 1.1% per annum. But in case of SGB, not only the transaction cost is negligible, it also provides additional interest of 2.5% per annum, which is free of income tax. However, as per financial planners, gold investment should not be more than 5-10% of your total portfolio.

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