Sovereign gold bonds explained

Gold has been an integral part of our culture and nothing has threatened our love for this yellow metal
Representational Photo
Representational PhotoFile/GK

When we look at the investment scenario in all precious metals, it’s the gold that enjoys investors’ confidences in all circumstances. Gold is considered the most dependable metal during uncertainties and economic crises. T

ime has proved that gold is more stable and liquid than any other asset class and has acted as a strong wall against any crises. Notably, investors have been using the power of gold since the times of the Great Depression in 1930 as a hedge to protect their investment portfolio in volatile market scenarios as well as to enhance returns and preserve their wealth.

Generally looking at the glitters of gold in our own context, we find Kashmiris have always viewed gold as one of the most valuable commodities and own it mostly to hedge during the times of any crisis.

Our elders tell us stories how gold has proved a gainful wealth insurance instrument during the times of crisis, be it Indo-Pak wars, natural disasters or political unrest.

Precisely, gold has been an integral part of our culture. Nothing has threatened our love for gold. Uniquely, mostly we own gold in the form of wearable wealth, like necklaces, bangles or earrings and very less as depreciation-safe bars or ingots. Such a treasury is a symbol of generations of patience, thrift and, of course, risk-averse genes.

Our great-great grandparents, who bought gold instead of having a piece of land, knew that if they managed to hang on to the gold, it would stand their off-springs in good stead.

Buying gold jewelry may not be called an investment in the rest of the world, but in our culture, it’s one of the most valuable investments. It has not only brought riches to the people but also rescued them during the times of crisis. For a Kashmiri, gold jewelry is the best way to preserve and invest wealth. Kashmiris have always felt that whenever they need money, they can sell their gold to generate cash. This is the way our parents and grandparents have always done it.

Over a period of time, the mode of investment in gold has undergone transformation. Exploring investment opportunities in gold is not cumbersome now. Apart from owning the gold in physical form, there are several modes of investment in gold without taking physical possession of the yellow metal.

These non-physical forms are referred to as paper gold. To elaborate, this paper gold is a kind of asset representing the price of gold on a particular day of investment. In other words, it’s not truly gold and is not backed by real metal.

So an investor in paper gold actually gets exposure to the price of gold without owning the yellow metal in physical form. Paper gold allows the investors to invest in gold even if they don’t have enough money to purchase an ounce. The most common examples of paper gold are gold certificates, gold futures accounts, and most exchange-traded funds.

Given the current interest rate scenario, macroeconomic environment and political uncertainty abroad, gold remains one of the best asset classes to invest in, and among the non-physical form of investment medium, it’s the sovereign gold bonds (SGBs) to invest in gold. For the first time, these bonds’ outstanding, since its launch in November 2015, went above the 100 -tonne mark.

What is the structure of sovereign gold bonds (SGBs)?

Sovereign Gold Bonds, introduced as part of the Gold Monetisation Scheme in India, are a form of securities guaranteed by the Government of India and issued by the Reserve Bank of India. The minimum investment in these bonds is one gram, and the maximum is 4 kgs for individuals and HUF. However, for trusts and entities, the maximum limit is 20 kgs, as notified by the government from time to time. These bonds are usually released in tranches and issued at a fixed price which is calculated as an average of the closing price of gold of 999 purity in the last 3 business days of the week just prior to the subscription period. The redemption price is also calculated in the same manner as the issuing price.

Precisely, investment in gold through these bonds is a simple way of having gold exposure in your portfolio without the hassles of owning and storing physical gold. Besides, investment in SGBs guarantees a fixed return of 2.5% (subject to change as per government announcements) on the initial investment throughout the period the bonds are held. The interest payout is done half-yearly and is taxable as per the individual income tax slab rates. However, there is no TDS on interest income.

Notably, investment in SGBs carries a lock-in period of 5 years. The tenure of the bond is eight years.

Moreover, they can also be sold in the secondary market after the lock-in period is over and earn through capital gains. Notably, investment in bonds can be done individually or jointly. And in the case of a joint application, the limit applies to the first applicant.

The investors are provided with a Holding Certificate, which acts as proof of investment. Besides, these bonds are issued as stocks as a part of the Government Security Act of 2006.

Is the investment in gold through SGBs safe?

Yes. Market risk apart, these bonds do not carry any other risk that is associated with holding physical gold. There are no making or designing charges as is the case with investment in physical gold. There is no threat of theft or change in ownership.

These bonds serve as a hedge against inflation. Historically speaking, gold has seen significant capital appreciation. As a result, investors will benefit from increases in the real value of their investments and accumulate significant wealth over time.

Notably, SGBs are accepted as loan collateral by banks. After setting the loan-to-value (LTV) ratio to the value of gold, they regard them as a gold loan. The ratio is set by the India Bullion and Jewelers Association Limited.

What happens to the investment after maturity of SGBs?

After the tenure of eight years, the bond matures and the redemption proceeds are automatically credited to the bank account. The capital gains upon maturity are completely tax-free. The price of purchase and redemption is decided based on the last three days’ average of the closing price of gold with 999 purity.

What percentage of investment should one hold in gold?

As far as professional investors are concerned, they should increase their exposure to gold if the economy and stock markets are highly volatile and lots of uncertainties are visible. For the sake of diversification and hedge against market uncertainties, experts have always favoured 2-5 per cent investment in gold in normal circumstances. However the ideal way to invest in gold is to invest in it regularly. And this way one can average out his price purchase to lay hands on higher returns when one decides to en-cash his gold holdings.

In the current geopolitical tension between Russia and Ukraine, and the uncertain global economic scenario, the experts don’t see any harm if investors diversify 15% of their investment portfolio into gold. According to a qualified market expert says: “One should stick to the fundamentals and allocate 10-15% of their portfolio to this strategic asset class that has time and again played a return-enhancing and risk-reducing role in investor portfolios in times of financial, geopolitical or other crisis. Those already invested should thus stay put. New investors should avoid lump-sum investment at current levels.”

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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