Should you invest in sovereign gold bond scheme?

Abhimanyu SofatAdviseSure The government, on 5th November 2015, approved Sovereign Gold Bond (SGB) to reduce the demand of gold in physical form for investment which has stirred a lot of interest among investors and buyers of physical gold. SGB scheme offers the purchase of bonds denominated in rupees per gram of gold. Both individuals and corporates can invest in them. So what is in it for you as an investor?>>An investor can purchase through commercial banks and designated post offices and earn an interest of 2.75% per annum>>Individuals and corporate entities can invest a minimum 2 grams and a maximum of 500 grams each year>>At the time of purchase or redemption, the investor is able to buy/sell as per previous week’s average traded price. At the time of selling, the settlement is done in cash>>There is a lockin period of 8 years although one can sell after completion of 5 years in tranches on interest payment dates>>One can also get loan against these bonds The total return offered by the gold bond depends on the movement in prices of gold. And hence it is important to understand how the gold prices change over a period of time.Movement in the price of gold can be attributed to macroeconomic scenarios such as1.Rupee depreciation – Rupee depreciation against US dollar leads to an increase in the price of gold2.World demand – Gold demand is both for consumption and for investment.3.Future perception – People perceive gold to be an inflation beating instrument and a go-to product whenever there is turmoil in the market. Assume that gold is priced at Rs 25000 per 10 grams. And you have bought SGB worth Rs. 1, 25,000 and held it for 5 years. You will also get interest at 2.75% compounded half-yearly on your investment of Rs. 1,25,000.Profit / Loss at end of 5 yearsThe returns must be seen in the light of the risks investors face. Here are some of the risks:In case the price of gold goes down, loss is borne by the investorThe interest earned is not enough to beat inflationIt is a close ended scheme with limited liquidity given that the bonds would be listed on the exchange although there may not be an active market for itTaxation: Interest earned on the gold bonds is taxable as per the tax bracket of the investor.

On maturity, the difference in buy and redemption price will result in capital gains. For holding period less than 36 months, capital gains are added to income. But for gains beyond 36 months you have to pay at 20 percent after indexation.SGB also has these benefits:>>In case of gold bond, there are no making charges levied, no annual fee>>There is also no fear of theft, wastage and purity since investment is in paper form>>Although the government does not use the funds to purchase gold, any increase in price of gold will be borne by the government at the time of redemption and Government of India has never defaulted on any loans>>The gold bond can be held in dematerialized form and traded on the exchange, thus allowing earlier exit for an investor>>Joint holding is also allowed and so is an investment on behalf of a minor. Also an individual can buy 500 grams in the name of each family member>>It is more beneficial than Gold ETF as it carries no management or storage fee and there is no risk of repayment which is present in case of ETFWhy is the Government offering it to the general public?The government too stands to benefit out of the issue of this bond•The government does not have to invest in physical gold and also no hedging is required. This frees it up to use the money for any purpose at an interest of only 2.75% whereas it raises loan at an interest rate of 7%•The risk of unhedged price rise can be offset by the reduction in import of gold due to the introduction of Gold Monetization Scheme and SGB.•Also curbing imports helps reduce Gold import bill given that the import of unrefined gold has surged to 150 tons in the first 8 months of FY2016 as compared to 120 tons for the entire year FY15Conclusion – An investor looking to get the benefits of Gold price upward movement, or for personal consumption can invest through SGB scheme since it is a credit risk free form of investment as they are backed by Government of India. There is no making charges or annual fees involved. There is also this added advantage where the amount of minimum purchase has been reduced to mere 30 grams from an earlier 500 grams. It is taxed as physical gold and there are indexation benefits offered.