Sovereign gold bond now open for subscription; is it a good tool for investment?

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The first tranche of the sovereign gold bond scheme for 2020-21 opened for subscription on April 20 with an issue price of Rs 4,639 per gram.

The Government of India will issue sovereign gold bonds (SGBs) in six tranches - from April 2020 to September 2020 - to domestic investors, a press release by the Reserve Bank of India (RBI) had said on April 14.

The bonds will be offered at a fixed rate of interest of 2.50 percent per annum payable semi-annually on the nominal value.

The subscription dates for the first tranche are April 20-24 while the dates for the last tranche are August 31-September 04.

The tenor of the bond will be for a period of 8 years with an exit option after the 5th year to be exercised on the interest payment dates.

The issue price of the gold bonds will be Rs 50 per gram less for those who subscribe online and pay through digital mode, while the 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.

Bonds will be sold through banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices (as may be notified) and recognised stock exchanges such as the National Stock Exchange of India Limited and Bombay Stock Exchange, either directly or through agents.

As per the RBI notification, bonds will be tradable on stock exchanges within a fortnight of the issuance on a date as notified by the RBI. The interest on gold bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961).

RBI defines SGBs as government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The bond is issued by RBI on behalf of the Government of India.

Good tool for investment?

Nish Bhatt, Founder & CEO of Millwood Kane International finds gold bonds a good tool of investment.

“Sovereign gold bond a substitute for holding physical gold without the hassle of buying and storing it physically as the gold bond is in paper or digital form. Its purity is guaranteed as it has Government of India's backing," said Bhatt.

Bhatt added that selling of gold bonds is also easy as there is no loss like in the case of making or molding charges of gold jewelry.

"Capital gains on soverign gold bonds are exempted if held till maturity of 8 years, also one can start trading it these will be tradable on stock exchanges within a fortnight of the issuance notified by the RBI. The best thing about them is the interest payment attached to it as investors stand to get 2.5 percent of interest on the initial investment, Bhatt said.

Gold is used as a natural hedge against uncertainty. Gold prices tend to rise steadily and more in times of economic turmoil. On the opposite end of the scale, when economies are flourishing, gold values fall as more adventurous and risky investments are made.

“The sovereign gold bonds issue from the RBI offers a good opportunity for investors to acquire gold for their investment portfolios. These bonds offer a 2.50 percent interest per annum, payable semi- annually, and also has the benefit of exemption from capital gains tax after a holding period of three years," said Joseph Thomas, Head of Research - Emkay Wealth Management.

Thomas believes with unprecedented developments, and the consequent fall in the global economies and markets, gold is likely to remain well bid, till the river of uncertainties is finally crossed whenever that would be.

"There is a growing demand for gold from central banks across the globe and also by ETFs in recent years. All these factors will keep the gold prices high, and only with an elimination of the current uncertainties and a rise in the US interest rates, we may see any halt in the upward movement in gold prices. Strategically, an amount equivalent to 5 percent of the overall portfolio should be invested into gold," Thomas said.

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