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Sovereign gold bonds: should you invest?

LiveMint logoLiveMint 26-04-2017 Vivina Vishwanathan

The first series of sovereign gold bonds for financial year 2017-18 are available for subscription till 28 April this year. Sovereign gold bonds are government securities issued in the units of grams. They are a replacement for physical gold and are available in paper or demat form. The bonds are issued by the Reserve Bank of India (RBI) on behalf of the government. Here is what you need know about them.

For this tranche, the sovereign gold bond is priced at Rs2,901 per gram of gold. The nominal value of the bond is based on the simple average closing price—published by the India Bullion and Jewellers Association Ltd (IBJA) for gold of 999 purity—in the week preceding the subscription period. This works out to Rs2,951 per gram but the bond is available at Rs50 discount. The government, in consultation with the RBI, is offering this discount and bringing the price down to Rs2,901 per gram. The minimum investment requirement is 1 gram and you can invest up to a maximum of 500 gram per financial year. From this bond, you will earn an interest of 2.5% per annum on the amount of initial investment, which will be paid to you half yearly. The issue date for this series of bonds is 12 May and the tenure is 8 years. However, you can withdraw prematurely after 5 years. The redemption price will be fixed on the previous week’s simple average closing gold price for 999 purity, as published by the IBJA. This means, you will get the available market value of gold at the time of redemption.

To buy the gold bond, you need to be a resident Indian and need documents such as passport, Permanent Account Number (PAN), voter’s identity card and Aadhaar number. You can apply for the bond at a bank, post office, Stock Holding Corporation of India Ltd (SHCIL), National Stock Exchange of India Limited and BSE Ltd. Customers can apply online and can buy it jointly too. You can use the bond as collateral for loans and the loan-to-value ratio will be as per gold loan norms mandated by the RBI. The interest you earn from the bonds will be liable to income tax and will be treated as interest income. On redemption, capital gains tax will be applicable. Long-term capital gains on gold are currently taxed at 20.6% with indexation. Remember that there may be a risk of capital loss if the market price of gold declines. Both interest and redemption proceeds will be credited to the bank account on maturity.

If you need the diversification that gold offers you in your portfolio, you could consider investing in this issue. “First you need to evaluate if you want to hold gold in your financial portfolio. If the answer is yes, then this is a much superior option than physical gold,” said Surya Bhatia, a New Delhi-based financial planner. The product also gives an interest unlike when you buy physical gold.

“It makes sense to hold the sovereign gold bonds, considering you get the underlying return as well as an additional 2.5% on the investment,” said Lakshmi Iyer, chief investment officer – debt, and head of products, Kotak Mahindra Asset Management Co. Ltd.

Gold exchange-traded funds (ETFs) come at a cost considering they have an expense ratio. The average cost is between 0.9% and 1% a year. While the bond gives you a return, the ETF costs you a bit to hold. The reflection of market price in both will be the same. The only plus for an ETF could be the liquidity. “Gold ETFs are liquid compared to sovereign gold bonds, which come with a lock-in of 8 years,” said Iyer. “Once you are sure you want gold in your portfolio, look for liquidity. If you want liquidity, gold ETF are a better option,” said Bhatia.

Also, with gold ETFs, there is no cap on how much you can invest. But with sovereign gold bonds there is a limit of up to 500 gram per investor in one financial year.

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