How to invest in Gold Bonds?

Those who save money in India still hold a traditional view of gold, that it is simple, an excellent investment, a protector of bad times and that all households should consider investing in it. The only option for such investors was to purchase it in its physical form, but times have changed and with the rapid advancement of technology and such, gold can now be bought in its digital form.

Digital Gold is a boon to society that will leave investors free from worry about safekeeping and storage, which will allow them to trade it easily unlike physical gold and reduce all ancillary costs.

Not only that, the introduction of Gold ETFs has revolutionized the way trading of gold is being done. It can be traded on the stock exchange where profits are realized with ease unlike selling physical gold which can be cumbersome.

There is now another option within the digital gold sphere in which one can invest in gold in the Demat form, trade it on the exchange and earn interest on the same. These are known as Sovereign Gold Bonds which are issued by the Reserve Bank of India (RBI) in discourse with the Government of India.

Let’s understand what are Sovereign Gold Bonds;

Sovereign Gold Bonds were introduced by the Government in the year 2015 under the Gold Monetization Scheme. The purpose of offering such bonds was to enable investors to invest in an asset class that is not physical gold. They are issued between the months of October 2019 to March 2020.

The RBI announces the public issue of gold sovereign bonds in tranches which specifies date of subscription of bonds and the date of allocation.

For the year 2019-20, following is the tranche table:

The sovereign gold bonds can only be bought under the specified subscription date slot and since they are issued on behalf of the Government of India, they carry a sovereign guarantee. Anybody who owns a Demat account can subscribe to these gold bonds. The minimum investment is 1 gram and the denominations are in the multiples of 1 gram gold only.

Before buying Sovereign Gold Bonds, here are a few things one must know about them:

1. Eligibility

Any Indian resident can buy sovereign gold bonds which also includes HUFs, universities, trusts, charitable trusts, etc. These bonds can also be bought by parents or guardians on behalf of minors. However, a Non-Resident of India cannot buy sovereign gold bonds

Also, if you became an NRI after purchasing gold bonds, you can hold them till their maturity but cannot trade them over the stock exchange nor can you repatriate the maturity value.

2. Denomination

Investment in sovereign gold bonds is denominated in multiples of gram or grams. The least that can be purchased is 1 gram.

For example, an investment of Rs. 10,000 for a gold rate of Rs. 4,000 per gram will be denominated as 2.5 grams.

3. Maximum investment

There is also a limit on the amount of gold that can be held in sovereign bonds. Given below is the amount for each category of investor and the amount that can be held by them in a given financial year i.e, April to March.

4. Issue Price

The price of the bond is fixed in Indian Rupees and is considered on the basis of the average closing price of the last three working days of the week preceding the subscription of gold having 999 purity. The closing rates are published by the Jewellers Association and Indian Bullion.

Also, the investors who subscribe for it online and pay digitally are given a discount of Rs. 50.

5. Interest rate

The interest rate is predetermined by the RBI and is announced at the time of the tranche launch. The present interest rate is 2.5% pa.

The amount of investment made will earn a certain amount of interest which is determined by the RBI for a given tranche at the time of its launch. Interest is paid semi-annually. The interest rate to date is close to 2.5 percent.

6. Redemption

The redemption price is calculated on the basis of the simple average of the closing price 999 purity gold of the previous three days from the date of repayment. This is also published by the Jewellers Association and Indian Bullion.

7. Maturity

The maturity period of sovereign gold bonds is 8 years with an option to exit in the fifth, sixth and seventh year. This is to be exercised on the date of interest payment. However, a transfer of bonds is allowed on the stock exchange platform making sovereign gold bonds highly flexible.

8. Loan Collaterals

If you wish to take a loan, then sovereign gold bonds can be put forward as collaterals. As per RBI instructions, the LTV (loan-to-value) ratio is on par with an ordinary gold loan.

9. Payment Options

Sovereign gold bonds can be bought using cash up to Rs. 20,000, by cheques, by demand drafts, or by online transfer. This is one of the few investment options where cash is accepted. However, on redemption, the money will be credited to the bank account.

If you are looking for a long term investment in gold, then sovereign gold bonds are recommended. One can avoid paying taxes on the redemption of sovereign gold bonds on maturity or after the fifth year. Also, since these are issued by the RBI, the chances of default risk are very low. Keeping the above-mentioned points in mind, one can consider investing in sovereign gold bonds.

Happy Investing!