SGBs: A Golden Ticket to Financial Security or a Fool's Paradise?

Concept of SGBs:

The Sovereign Gold Bond (SGB) Scheme, initiated by the Government of India in November 2015, aims to reduce dependence on physical gold and promote domestic savings in financial markets. These government securities are denominated in grams of gold, serving as an alternative to owning physical gold. Tradable on stock exchanges, SGBs offer the advantages of gold investment combined with the convenience of bonds. Investors purchase these bonds at the issue price in cash, and upon maturity, they are redeemed in cash. The RBI periodically introduces limited tranches of SGBs, available only to new buyers within a specified period. For instance, the recent Sovereign Gold Bond Scheme 2022-23 – Series IV (tranche) was available for purchase from March 6th to March 10th, with an issue price set at Rs 5,611 per gram of gold.

Eligibility:

Persons resident in India, as defined under the Foreign Exchange Management Act, 1999, are eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities, and charitable institutions. Individual investors who experience a subsequent change in residential status from resident to non-resident may continue to hold SGB until early redemption/maturity.

How to invest in SGB’s?

A person can apply for a SGB through their banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices and recognised stock exchanges, such as the BSE & NSE, either directly or through agents.SGBs can also be bought online through the commercial banks’ websites authorised to sell them. As per RBI instructions “Every application must be accompanied by the ‘PAN Number’ issued by the Income Tax Department to the investor(s)’’ as the PAN number of the first/ sole applicant is mandatory.

 Are SGB’s a Golden Ticket for Investors? : Unveiling its advantages

1.Interest Payment & Tax Benefit: Sovereign Gold Bonds offer a fixed annual interest rate – 2.50% per annum, paid semi-annually, guaranteeing income regardless of gold price fluctuations. There’s no TDS on the interest, and indexation benefits apply upon early bond transfer. Capital gains post-maturity redemption are tax-exempt, but the interest is fully taxable as per your income tax slab.

2.Paper/Demat Format & Safety: SGBs are available in paper or demat format, eliminating concerns around physical gold storage. Investors receive a holding certificate, ensuring ownership without the worry of theft or storage costs.

3.Purity Assurance: Unlike physical gold, Sovereign Gold Bonds involve no physical gold, relying instead on the Reserve Bank of India and the Government of India’s guarantee to honour gold prices at redemption. This eliminates concerns about gold purity issues.

Investing In SGB’s – A Fool’s Paradise? : Unveiling it’s disadvantages

Liquidity and Long-Term Focus: Due to limited market liquidity, smaller investors may find it difficult to quickly sell SGBs. The SGBs have an eight-year tenure with an option to exit after five years, making them better suited for long-term investments rather than short-term cash needs.

Tax Complexity: To qualify for exemption from capital gains tax, Sovereign Gold Bonds (SGBs) need to be held for the full eight-year tenure. Any sale or redemption before this period subjects the capital gains to taxation. Additionally, the interest earned from SGBs is fully taxable at the applicable peak income tax rates.

Investment Limits: SGBs impose annual caps of 4 kilograms for individuals and HUFs and 20 kilograms for trusts. These limits may hinder high net worth individuals who seek larger gold exposures.

Is SGB the real pick?

Other alternatives to SGB are –

Physical Gold: When investing in physical gold, such as coins, bars, or jewellery, one must consider storage and the impact of market prices. Although it offers immediate liquidity, it comes with issues like making charges and storage costs.

Digital Gold: Digital gold offers convenience and innovation, allowing for online purchases, secure storage, and cash redemption. Ideal for small investors, it eliminates physical storage concerns and offers flexibility.

Gold ETF: Gold ETF is a stock-exchange-traded fund that allows paper-based gold investment without the need for physical storage. Its value depends on gold market prices and fund performance, providing liquidity through stock exchange trading.

Gold Mutual Funds: Gold mutual funds offer diversification beyond physical gold by linking to the performance of the gold mining sector, providing an alternative for those interested in the gold industry.

Investors in the initial batch of Sovereign Gold Bonds (SGBs) are poised for substantial gains at maturity on November 30, with an expected Compound Annual Growth Rate (CAGR) of 10.88 percent. The recent RBI notification fixed the final redemption price at Rs 6,132 per unit of SGB, determined by the average closing price of gold from November 20-24, 2023. Originally issued in 2015 at Rs 2,684 per gram, these bonds initially carried a fixed interest rate of 2.75% per annum, later revised to 2.5% in subsequent issues.

The Verdict? A Golden Ticket with Cautious Steering

Sovereign Gold Bonds (SGBs) offer individuals an enticing investment opportunity that combines gold’s appeal with government backing. However, it’s essential to maintain a balanced approach that acknowledges the risks involved while emphasising the importance of diversification. If you understand the risks and incorporate SGBs seamlessly into your investment strategy, they can provide financial stability. However, if you’re drawn to gold without conducting proper due diligence, SGBs may lead to disappointment. Before investing in SGBs, it’s crucial to evaluate the risks, seek financial advice, and diversify your investments to ensure a secure financial future.

Sources:

Moneycontrol

ICICI Bank

RBI

Live Mint