Sovereign Gold Bonds 2020 – What’s the deal?

There is no shortage of investment options for risk averse investors. Today we take note of the hottest thing in town – Gold. More specifically, Sovereign Gold Bonds 2020.

Gold, as you know, has had a fabulous run. A year ago, it was priced at about Rs. 32,000 per 10 grams. Today, the price of gold for the same unit size is about Rs. 47,000. A total return of close to 50% in just 1 year.

There is a renewed interest in the rare, shiny metal.

As some experts also say, the expected condition of the world (at least in the short term) is expected to provide more upside.

If you have bought into the story, you may be now also be evaluating the best way to buy into Gold.

Here are a few ways available to buy gold as an investment:

• Physical Gold in form of coins and bricks – In case of world annihilation, these will be closest to you. You may have others eyeing your holding creating extra costs of safety, storage and insurance.
• Gold funds / ETFs offered by mutual funds. Note, these funds are backed by actual gold lying in vaults. They are liquid, you can buy or sell them any time (online too). For a larger holding, you may even directly exchange your units for gold from the company. However, you can expect brokerage and other taxes to come calling.
• Digital Gold or DigiGold – A relatively newer option allows you to buy gold in digital form. it is backed by actual gold purchased by the company you buy from and kept in vaults. You can even call for physical gold delivery after paying any additional charges, as applicable.
• Sovereign Gold Bonds – These are pseudo gold holdings offered by the Govt of India through the RBI. You hold paper Bonds and not actual physical Gold. However, the value is tied to the market price of Gold.

Our focus today is the Sovereign Gold Bonds or SGBs. They are an interesting innovation. Let’s take a look at some of the key features.

Key features of Sovereign Gold Bonds 2020

1. Name: The bonds will be available under the series name Sovereign Gold Bonds 2020 – 21.
2. Holding type: Bonds in physical or demat form. You don’t need to hold actual physical gold and yet you get an investment which replicates price of gold.
3. Interest: Interest at 2.5% on the investment value, paid out every half year. There is no cumulative option.
4. Maturity: Maturity period of 8 years. However, early redemption at interest payment date is allowed after 5 years of holding.
5. Taxation: Interest is taxable at your income tax bracket. There is no TDS applicable. If you hold till maturity, it is exempt from capital gains tax. If you cash out before, you will still get cost indexation benefits as available to real estate and debt funds.
6. Proof of Holding: A Certificate of Holding is issued to the investor for the Sovereign Gold Bonds.
7. Tradability & Collateral: The bonds can be traded in the secondary market via stock exchanges. You can also use them as a collateral for any loans.
8. Transferability: You can transfer the bonds to any eligible buyer.
9. Redeem for Gold: No, you cannot redeem the SGBs for Gold. The redemption will be done in Indian Rupees only.
10. Min or Max Investment: Min investment is 1 gm of gold and maximum is 4 KG for Individuals and HUFs. At today’s rates, that means minimum investment of about Rs. 4,600 and max investment of Rs. 4.6 crores. This limit is on a per year basis.
11. Who can buy: Resident Individuals, HUFs, Universities and Charitable Trusts are eligible to apply for the SGBs. NRIs are not eligible.
12. Where to apply: You can apply through your bank, post offices and other designated agencies. Applications can be done in physical as well as electronic format.
13. Online Discount: If you apply online, a discount of Rs. 50 for each unit is available.

Are Sovereign Gold Bonds 2020 currently open for subscription?

This FY 2020-21 will see a series of offerings. One of these just completed in April 2020. The next issuance is due on May 11 and then in June, July and August. Refer to the table below for details.

The older listings of SGBs is available at discounts. Shouldn’t one buy them?

Well, some of the older issues listed on the stock exchanges are available at a discount of upto 5% from the current direct offering by the Govt.

It’s the same bond with the same features (except in some cases where the interest rate is 2.75%) and yet at a lower price.

Check out prices at the NSE website

By all means, if your requirement can be fulfilled through the secondary markets, go ahead, save some money and make your investment more attractive.

For investment upto a few lakhs, this is quite feasible. Though, it comes with some effort as the no. of trades are limited and only smaller quantities are on offer.

Of course, when you buy/sell online, brokerage, if any, and other statutory charges are applicable too.

For anyone looking for purchasing a substantial quantity, buying SGBs directly is a more convenient option.

Should you buy Sovereign Gold Bonds 2020, at all?

The benefits of an interest on the bond, linkage to market gold price and exemption from capital gains make these bonds very attractive.

As long as you are keeping expectations in check from this investment, willing to hold on for 5 years or more and are OK with a paper bond instead of physical gold, you may buy these bonds.

Remember, gold prices fluctuate. I have mentioned it before that gold has the worst of the 2 asset classes: volatility of equity and returns of fixed income.

If you revisit the price chart of Gold, you will see that while the return in last one year is about 50%, the return for 4 years (starting 2016) is also about 50%.

For about 3 years from 2016 to 2018, the price of gold went nowhere.

Of course, it has its usefulness in diversification, specially in uncertain times like these. It acts as portfolio insurance.

Finally, don’t go overboard. When you do decide to buy, align your investment to your portfolio asset allocation.

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