Sovereign Gold Bond Scheme 2023-2024 Series II: Should You Buy?

In India, gold holds significant cultural and religious importance as it symbolises Lakshmi, the goddess of wealth and prosperity. This sentimental value has led to gold playing a major role in Indian religious ceremonies, weddings, and festivals like Akshaya Tritiya, Dhanteras, and Diwali. Furthermore, in recent decades, gold has transitioned from being primarily used for jewellery to becoming a popular investment option.

Due to its consistent increase in value, gold has been a reliable source of financial security for many years. During times of financial difficulties or crises, people can sell their gold jewellery or pure gold bars/coins to access funds or opt for a Gold Loan.

While physical gold has been the traditional choice for many individuals, there exists a superior alternative known as Sovereign Gold Bonds, which provides several advantages over owning physical gold. So, what exactly are Sovereign Gold Bonds?

Sovereign Gold Bonds are bonds issued by the Reserve Bank of India (RBI) on behalf of the Government of India. Essentially, SGBs are government securities denominated in grams of gold. The Indian government introduced the Sovereign Gold Bond (SGB) Scheme in November 2015 to provide investors with an alternative to holding physical gold. Investors need to purchase these bonds at the issue price in cash, and they can later redeem them for cash when they mature.

Here are the key features of Sovereign Gold Bonds:

• The quantity of gold paid for by investors is protected, as they receive the prevailing market price at the time of redemption.

• It is considered a superior alternative to holding physical gold because it allows investors to benefit from the appreciation in the gold price while also earning a fixed interest rate.

• Investors receive a fixed interest rate of 2.50% per annum, paid semi-annually on the nominal value.

• SGBs eliminate the risk and cost associated with physical storage as they are paper-based instruments.

• The bonds are held in the books (records) of the RBI or in a dematerialised (de-mat) form, eliminating the risk of loss or theft. Investors have the option to convert their holdings into a dematerialised form.

• There is a risk of capital loss if the market price of gold declines. However, investors do not experience loss in terms of the units of gold they have paid for.

• SGBs are exempt from concerns such as making charges, GST, and gold purity that buyers of gold jewellery may encounter.

• SGBs are available for purchase by resident individuals, Hindu Undivided Families (HUFs), Trusts, Universities, and Charitable Institutions. However, NRIs and foreign institutions are not permitted to own these bonds.

• The tenure of SGBs is eight years, but investors can opt for premature redemption after the 5th year from the investment date.

• SGBs are issued in denominations of one gram of gold and multiples thereof. The minimum investment in SGBs can start as low as one gram, with a maximum subscription limit of 4 kilograms for individuals and HUFs and 20 kilograms for trusts and similar entities designated by the government each fiscal year.

• In cases of joint holdings, the investment limit applies to the first holder only.

• The bond's price is determined in Indian Rupees by calculating a simple average of the closing price of gold with 999 purity, as reported by the Indian Bullion and Jewellers Association Limited (IBJA) over the three working days preceding the subscription period. Investors who opt for online subscriptions and pay through online channels receive a discount of Rs 50 per gram.

• The redemption amount will be in Indian Rupees and will be based on a simple average of the closing price of gold with 999 purity over the three preceding working days, as published by IBJA Ltd.

• Sovereign Gold Bonds (SGBs) are available for purchase through various channels, including commercial banks, the Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Limited (CCIL), designated post offices, and recognised stock exchanges such as the National Stock Exchange of India Limited and the Bombay Stock Exchange Limited. This can be done directly or through authorised agents.

• Upon issuance of the SGB, investors will receive a Certificate of Holding, which can be collected from issuing banks, SHCIL offices, post offices, designated stock exchanges, or directly from the Reserve Bank of India (RBI) via email if an email address is provided in the application form.

• Interest earned on SGBs is subject to taxation in accordance with the provisions of the Income Tax Act 1961. However, capital gains tax on the redemption of SGBs by an individual is exempted, and indexation benefits are provided for long-term capital gains resulting from the transfer of SGBs.

• SGBs can be traded, but take note that if the bonds are sold through an exchange platform, the applicable capital gains tax will be payable at the same rate as for physical gold.

• The only mandatory document required to invest in SGBs is a PAN Card; without it, you cannot invest in these bonds.

Has the latest Sovereign Gold Bond (SGB) Tranche Open for Subscription?

According to the Reserve Bank of India, the latest Sovereign Gold Bond (SGB) tranche (Sovereign Gold Bond Scheme 2023-2024 Series II) has been opened for subscription on Monday, September 11, 2023 and will remain open till Friday, i.e. September 15, 2023.

The RBI, in its notification, also said, "The nominal value of the bond based on the simple average of the closing price for gold of 999 purity of the last three working days of the week preceding the subscription period, i.e. September 6-8, works out to Rs 5,923 per gram of gold."

What Are the Benefits of Investing in Sovereign Gold Bond Scheme 2023-2024 Series II?

• In addition to benefiting from price fluctuations, Sovereign Gold Bonds (SGBs) also provide a fixed annual interest rate of 2.5% on the issue price. This interest is deposited into the investor's registered bank account twice a year. This is a significant advantage over physical gold, which can only offer potential capital appreciation.

• These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India, ensuring transparency and trustworthiness in this investment option.

• Being a paper-based instrument, SGBs eliminate the need for storage and associated costs, a feature not shared by physical gold.

• Unlike physical gold, when you invest in SGBs, you don't have to worry about the purity of the gold.

• Investing in physical gold often incurs additional expenses like making charges and GST, which are entirely avoided when you choose SGBs.

• You have the flexibility to purchase these bonds at your convenience, whether online or offline. Furthermore, online purchases of SGBs through online payment methods will reduce the price by Rs 50 per gram compared to the actual issuing price.

• SGBs are considered a liquid investment option because premature redemption is allowed after the 5th year. In emergencies, you can sell the bonds or use them as collateral to secure a loan, with the same Loan-to-Value ratio applicable as with physical gold loans.

• Since these bonds can be traded on stock exchanges, you have the freedom to buy or sell them even when there is no ongoing issue from the RBI.

• SGBs can be purchased jointly, and it's also permissible to buy them in the name of a minor with a guardian.

Should You Invest in Sovereign Gold Bond Scheme 2023-2024 Series II?

Incorporating gold into your investment portfolio can enhance its resilience and contribute to its long-term stability, reinforcing the overall strength of your portfolio. Gold typically exhibits a negative correlation with equities, offering a protective shield for your portfolio when equity markets face uncertainty and stress.

Gold holds strong potential over the long term and hence, it makes sense to explore this investment avenue if you haven't allocated a portion of your portfolio to it.

Considering the fact that the global economy is witnessing a significant slowdown, it is advisable to diversify your portfolio by allocating around 10% to 15% of your investments to gold.

Gold is known for its high liquidity and proves to be an effective diversification tool for your portfolio. It represents a valuable investment strategy, allowing you to hedge your portfolio against various risks intelligently. Investing in Sovereign Gold Bonds is a convenient and cost-effective alternative to physical gold, making it an attractive option for portfolio diversification.

Therefore, if you are seeking to diversify your portfolio with a low-risk investment avenue that also provides a fixed return, considering Sovereign Gold Bond Scheme 2023-2024 Series II is a prudent choice at this time.

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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.
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 in the above-mentioned schemes.