Sovereign Gold Bonds 2023-24 Series I & II: Is It a Wise Investment Choice?

The Reserve Bank of India (RBI) has announced the issue of Sovereign Gold Bonds (SGBs) in two tranches in the first half of the current financial year, 2023-24. The subscription period for Series I will be from June 19th to June 23rd, 2023, and for Series II, it will be from September 11th to September 15th, 2023.

Gold holds significant cultural and religious importance in India, as it symbolises Lakshmi, the goddess of wealth and prosperity. It carries sentimental value and is widely used in religious ceremonies, weddings, and festivals such as Akshaya Tritiya, Dhanteras, and Diwali. Over the past few decades, gold has transitioned from being a precious metal exclusively used for jewellery to becoming a popular investment instrument.

Gold has proven to be a valuable asset during challenging times and financial crises, as its value tends to appreciate consistently. When in need, we can sell our gold jewellery or pure gold bars/coins to get funds or opt for a Gold Loan. While purchasing physical gold has been the traditional choice for many, there exists a superior alternative known as Sovereign Gold Bonds, which offer numerous advantages over physical gold.

What Are Sovereign Gold Bonds?

Sovereign Gold Bonds are financial instruments that offer an alternative to owning physical gold. These bonds are issued by the Reserve Bank of India (RBI) and backed by the Indian government. SGBs are denominated in grams of gold. Instead of purchasing physical gold, investors are required to pay the issue price of the bonds in cash, and when the bonds reach maturity, they can be redeemed for cash. This scheme aims to offer individuals a convenient and secure means of participating in the gold market while enjoying the benefits of financial security and transaction convenience.

The issue date of the Sovereign Gold Bond Scheme 2023-24 Series I, which will be open for subscription from June 19 to June 23, 2023, will be June 27, 2023. Similarly, the issue date of the Sovereign Gold Bond Scheme 2023-24 Series II, which will be open for subscription from September 11 to September 15, 2023, will be September 20, 2023.

What Are the Key Features of the Sovereign Gold Bonds?

• The redemption value of SGBs is determined by the prevailing market price of gold at the time of redemption, ensuring that investors receive the ongoing market price for the quantity of gold they paid for.

• SGBs offer the opportunity to earn from the appreciation in the gold price, along with a fixed interest rate of 2.5% per annum paid semi-annually on the nominal value.

• As a paper-based instrument, SGBs eliminate the need to store physical gold, reducing associated costs and risks.

• The bonds are held by the RBI or a depository, minimising the risk of loss or theft, and can be converted into dematerialised (de-mat) form.

• While there is a risk of capital loss due to a decline in the market price of gold, investors retain the units of gold they initially paid for.

• SGBs bypass concerns related to making charges, GST, and gold purity associated with purchasing gold jewellery.

• SGBs are available for purchase by resident individuals, HUFs, trusts, universities, and charitable institutions, but NRIs and foreign institutions are not eligible to invest.

• The bonds have an eight-year tenure, with the option of premature redemption after the fifth year.

• Denominations for SGBs start from one gram of gold, and the minimum investment can be as low as one gram, with maximum subscription limits based on the investor category.

• The bond price is fixed in Indian Rupees based on the average closing price of 999 purity gold published by IBJA for the preceding three working days before the subscription period.

• The redemption price is also determined in Indian Rupees based on the average closing price of 999 purity gold published by IBJA for the previous three working days.

• The sale of SGBs will be facilitated by Scheduled Commercial banks, Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Limited (CCIL), designated post offices, and recognised stock exchanges, namely the National Stock Exchange and Bombay Stock Exchange Limited. Take note that Small Finance Banks, Payment Banks, and Regional Rural Banks are excluded from the list of institutions authorised to sell these bonds.

• A Certificate of Holding is issued to customers upon SGB issuance, which can be obtained from the issuing banks, SHCIL offices, post offices, stock exchanges, or RBI via email.

• The interest earned on SGBs is taxable, while individuals are exempt from capital gains tax upon redemption. However, selling the bonds after the 5-year lock-in period but before maturity will result in taxable gains.

• SGBs can be traded, and if sold through the exchange platform, capital gains tax is applicable at the same rate as for physical gold.

• The mandatory document required to invest in SGBs is the PAN Card.

• Online subscribers who pay through online mode receive a discount of Rs 50 per gram, and the redemption price is based on the average closing price of 999 purity gold published by IBJA for the previous three working days.

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What Are the Benefits of Investing in Sovereign Gold Bonds 2023-24 Series I & II?

1. Fixed Interest Rate:

Investing in Sovereign Gold Bonds 2023-24 Series I & II offers a fixed interest rate of 2.5% per annum on the issue price. This interest is paid twice a year into the investor's registered bank account, providing a reliable source of regular income.

2. Potential for Capital Appreciation:

By investing in SGBs, investors have the opportunity to benefit from the price fluctuations of gold, allowing for potential capital appreciation in addition to the fixed interest rate.

3. Transparent And Reliable:

Issued by the RBI on behalf of the Government of India, the Sovereign Gold Bond is a transparent and trustworthy investment option.

4. Cost-effective:

As a paper-based instrument, the SGB eliminates the need for storage, making charges, and GST, which makes it a cost-effective investment choice.

5. Assured Purity:

Unlike physical gold, there are no concerns about the purity of the gold in SGBs, as they are issued in 999 purity.

6. Tax Benefits:

While the interest earned on the bonds is subject to taxation as per the Income Tax Act of 1961, individuals are exempt from capital gains tax upon redemption of the SGBs. Long-term capital gains from the transfer of SGBs are eligible for indexation benefits.

7. Convenient Purchase:

Investors can purchase the bonds online or offline. Having said that, with online purchases made through online payment mode, an investor can avail of a discount of Rs 50 per gram on the issue price.

8. Liquidity:

Sovereign Gold Bonds can be traded on stock exchanges, providing liquidity for investors. Premature redemption is also allowed after the fifth year.

9. Collateral Option:

In times of emergency, the SGBs can be used as collateral for securing loans, with the same loan-to-value ratio applicable as for physical gold loans.

10. Joint Holding And Minor Investments:

Investors have the flexibility to purchase the bonds jointly and buying them in the name of a minor along with a guardian is also permitted.

Is Investing in Sovereign Gold Bonds 2023-24 Series I And Series II a Wise Investment Choice?

When building a portfolio, it is advisable to consider a combination of diverse asset classes. While equity mutual funds can generate inflation-beating returns, they usually come with high risks and require careful selection based on individual risk tolerance, investment goals, and many other factors. Although high-return assets are essential for a successful portfolio, an ideal portfolio is one that consists of various asset classes that complement each other.

This is where gold can play a significant role as a diversification option. Gold is often regarded as a safe asset, performing well during periods of economic uncertainty and market volatility. When faced with economic crises or uncertainties, investors often seek refuge in safe assets like gold, which can help stabilise a portfolio. Furthermore, gold has a low correlation with other asset classes, such as equity and bonds, making it an effective diversification tool. Including gold in a diversified investment portfolio can mitigate overall risk and potentially enhance returns.

While traditional investors may opt for physical gold purchases, the SGB Scheme presents a superior alternative with several advantages over physical gold. The scheme allows investors to invest in gold without the concerns of storage and security associated with physical gold. Additionally, Sovereign Gold Bonds offer interest income along with the potential for capital appreciation, making them an efficient means of investing in gold. Overall, incorporating gold into an investment portfolio, especially through the Sovereign Gold Bond Scheme, can facilitate diversification and provide stability during times of market volatility.

Given the current economic uncertainty and rising inflation rates worldwide, it is prudent to diversify your investment portfolio with different asset classes. Many financial experts recommend allocating 5% to 10% of your portfolio to gold investments, as it is a highly liquid option that effectively adds diversification. Gold has served as a safe haven throughout history during economic uncertainty and inflationary periods. Investing in gold can act as a hedge against these risks and prove to be a smart and worthwhile addition to diversify your portfolio.

The Sovereign Gold Bond Scheme 2023-24 Series I & II present an attractive investment opportunity as it offers a convenient and cost-effective way to invest in gold compared to physical gold. Furthermore, Series I & II provide a fixed interest rate, adding to its appeal as an investment option.

Having said that, understand that gold prices can be volatile due to various factors such as geopolitical tensions, inflation, and economic conditions. And hence, it is advisable to invest only a portion of your portfolio in Sovereign Gold Bonds, considering your risk tolerance, investment goals, and time horizon.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.