Sovereign gold bonds. Sovereign gold bonds: Bonding with gold, the smart way

Are you buying gold jewellery today to gift your daughter on her wedding which is a long time away?

Jewellery is the most expensive way of buying gold. What if trends change and your daughter doesn’t like what you have bought today?

At the time of purchase, you cough up 10-15 percentage extra for each gram and when you trade old for new, you again lose 5-10 percentage on ‘wastage’ on old gold.

There is a smarter way to buy gold.

Sovereign gold bonds, issued by the Government, are a proxy to investing in physical gold.

These can be purchased from banks, the Stock Holding Corporation of India, designated post offices and the National Stock Exchange of India and the Bombay Stock Exchange when the issue is open. The bonds track the international price of gold.

When prices go up, your investment value too rises. The investment tenure of these bonds is eight years with premature exit allowed after the fifth year.

Attractions

You can redeem your investment in these bonds once they get listed on the stock exchanges within a fortnight of the close of the issue. When you exit, for each unit of the bond, you will get the market price of a gram of gold.

The advantage with these bonds is that, there are no additional charges. You don’t cough up for the ‘making charge’ or ‘wastage’, which you will do if you buy gold coins or jewellery. And, unlike physical gold where you incur a cost for safe-keeping by paying for a bank locker, with the bonds, you can be worry free. They can be stored in the demat account with your other investments.

Among the paper form of gold investments too, sovereign gold bonds are the best.

In gold ETFs, there is a fund management fee, which reduces your overall returns on the yellow metal, but in sovereign gold bonds, there is no such charge.

The key attraction is that the sovereign gold bonds come with a coupon of 2.5 per cent per annum, which means when gold prices go up during the tenor of the bond, you get the twin benefits of price gain as well as interest, and when gold prices fall, you are not impacted as much as your peers who invested in physical gold, as you will get the coupon on the bond.

How to invest

One can invest up to a maximum of 4 kg gold (minimum is 1 gram) in a financial year (including investments made through the secondary market for the bond). When the issue is open, the bond issue price details can be found on the RBI’s website. In the 2017-18 Series-III sovereign gold bonds, which were open for subscription till end December 2017, between Monday and Wednesday of every week, there was a discount of ₹50 gm on the issue price for those investing in these bonds online. Currently, the issue is closed. Those desirous of investing should look at buying it from the secondary market.

Interest payments you receive from these bonds are taxable, but capital gains on redemption (if held till maturity) are tax exempt.

Buying from the secondary market entails brokerage charges.

The one fact you will have to note is that in the secondary market, the liquidity in these bonds is low. If your investment horizon is only one to two years, it is not a great idea to look at investing in these bonds. Based on the demand-supply of these units, prices in the secondary market trade at premium/discount to spot prices.

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