Should You Subscribe to Sovereign Gold Bond Scheme This Dhanteras?

Nov 01, 2021

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The five-day-long Diwali festivities starts tomorrow (November 02) with Dhanteras, and many consider it to be an extremely auspicious day for new purchases, especially items made of gold and silver, or new household utensils made of steel, copper, brass, etc.

Like most festivals in India, the significance of buying precious metal like gold during Dhanteras is linked with a popular mythological anecdote. As per legends, there was a king named Hima. One day an astrologer told Hima that his son would die on the fourth day of his marriage. On hearing this, Hima's daughter-in-law laid a lot of gold jewellery and silver coins as well as diyas at the door.

When Yama, the god of death, came disguised as a serpent to take away the life of king Hima's son, the strong light of the glittering jewellery along with the bright diyas blinded him. As a result, Yama had to return without taking the life of Hima's son. Since Hima's son was spared from the clutches of death due to wealth (Dhan), and this day later came to be celebrated as Dhanteras.

Accordingly, the ritual of buying gold and silver came to be associated with Dhanteras. People believe that buying gold and silver on the day of Dhanteras will bring good luck and prosperity to their house and business ventures and protect them from bad omens and negativity.

On this day, devotees worship Goddess Lakshmi, the deity of wealth and good fortune, along with Lord Ganesha, the god of wisdom, because the right wisdom is necessary to spend wealth wisely.

Should You Subscribe to Sovereign Gold Bond Scheme This Dhanteras?
Image source: starline - www.freepik.com
 

In India, people traditionally purchase gold in physical form. However, in current times, investing in gold is not restricted only to buying physical gold. It has evolved, and one has the option to purchase gold via Sovereign Gold Bonds or Gold ETFs. Of these, the Sovereign Gold Bond has many advantages over physical gold.

What are Sovereign Gold Bonds?

In order to encourage passive but direct gold investment, as an alternative to purchasing physical gold, the Modi led Government sanctioned Sovereign Gold Bond Scheme in November 2015. Sovereign Gold Bonds are government securities denominated in grams of gold. These bonds are issued by the Reserve Bank of India on behalf of the government. Investors who subscribe to Sovereign Gold Bonds pay the issue price in cash and the bonds are redeemed in cash on maturity.

Bonds are sold through Commercial banks, Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Ltd. (CCIL), designated post offices (as may be notified), and recognised stock exchanges, either directly or through registered agents.

The RBI notifies the launch of different series of Sovereign Gold Bonds in advance (usually at the beginning of the financial year). The price of gold for the relevant tranche is published on the RBI website two days before the issue opens. The RBI recently issued the seventh tranche of Sovereign Gold Bonds for Financial year 2021-22 at issue price of Rs 4,765 per gram.

Table: Subscription details of upcoming Sovereign Gold Bond issue

Table
(Source: RBI)
 

These bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment allowed in the Bond is 1 gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF), and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April - March). In case of joint holding, the limit applies to the first applicant.

Here are the benefits of owning gold via Sovereign Gold Bonds:

  1. Along with the capital appreciation linked to the rise in price of gold, investors in Sovereign Gold Bonds receive guaranteed interest at 2.5% per annum on the issue price. Interest is credited semi-annually to the bank account of the investor. The final interest is paid along with the principal at the time of maturity. This differentiates Sovereign Gold Bonds from Gold ETFs and physical gold wherein you benefit only from the appreciation in the price of gold.

  2. Investment in Sovereign Gold Bonds is free from additional expenses such as making charges and GST which increases the cost of buying gold when you purchase it in physical form.

  3. Since Sovereign Gold Bonds is issued by RBI, the investment process is fully transparent.

  4. When you buy gold in physical form, there could be concerns about the purity of the metal and/or theft, which are not concerns when you buy gold through Sovereign Gold Bonds.

  5. Sovereign Gold Bonds can be purchased offline or online. If you buy these bonds online, the price of the issue will be Rs 50 per gram lower than the nominal value.

  6. Sovereign Gold Bonds are eligible to be used as collateral when availing of a loan from Banks, NBFCs, or other financial institutes. The Loan to Value ratio of such a loan is the same as applicable to ordinary gold loan prescribed by the RBI from time to time.

  7. Sovereign Gold Bonds can be held in Demat form and traded on exchanges. This means that you can purchase these bonds from exchanges even if there is no ongoing issue from the RBI.

  8. Joint holding is allowed. A guardian can also apply on behalf of a minor.

  9. You will receive assured allotment of units, provided you meet the eligibility criteria and produce the required documents.

  10. Investment in non-physical gold helps the government to keep a check on the currency and larger fiscal deficit.

Infographic
 

The tenure of Sovereign Gold Bonds is 8 years with a lock-in period of 5 years. You can fully or partially redeem the bonds from the 5th year onwards. However, you cannot redeem units less than 1 gram.

If you wish to sell it before the completion of 5 years, you can do so by selling it in the secondary market, i.e. on exchanges. To sell it on the exchange the bonds need to be held in Demat form. If you are holding Sovereign Gold Bonds in physical form you can convert it in Demat form. Do note that at times there could be liquidity constraints in the secondary market and you may have to sell your bonds at a discount to the prevailing price. However, this can be a good opportunity from the buyer's point of view since it may be possible to purchase bonds at a price that is lower than the prevailing rate.

Sovereign Gold Bonds is also a tax efficient avenue for investors with a long term horizon. Investment in these bonds, if held for 5 years or more or till maturity, is exempt from capital gain tax. Notably, interest received on Sovereign Gold Bonds is fully taxable.

If you redeem the investment before 5 years, capital gains arising will be taxed as follows:

- Short term capital gain tax will apply as per the rate applicable to your income if the holding period is less than 3 years

- Long term capital gains tax will apply at the rate of 20% + cess with indexation benefit if the holding period is more than 3 years but less than 5 years.

On maturity, the Gold Bonds are redeemed in Indian Rupees. The redemption price is based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited (IBJA).

Does it make sense to invest in gold now?

In the calendar year 2021, gold has lost sheen; it is down by around 4% on a year-to-date basis. Buoyant equity markets in other major economies supported by enough liquidity, brighter economic outlook for the fiscal year 2021-22, increase in COVID-19 inoculations, relaxation in COVID-19 guidelines, the uptick in economic activity due to phase-wise opening, strong U.S. dollar, improving consumer and business confidence, are some of the factors that would keep gold under pressure.

But it is important to note that not all asset classes will deliver handsome returns year after year. Some have their period of underperformance. Thus, it makes sense to approach gold strategically.

Graph: Gold has proved its worth as an effective portfolio diversifier

Graph
(Source: ACE MF, PersonalFN Research)
 

Allocating around 10-15% of your entire investment portfolio to gold and hold it with a long-term investment horizon will be a smart and sensible thing to do. Instead of buying physical gold, consider investing in gold 'the smart way' through gold Exchange Traded Funds (ETFs), gold savings funds, or Sovereign Gold Schemes.

Remember, gold is symbolic of Goddess Lakshmi, a mark of wealth, highly liquid, shield against inflation, and will prove to be an effective portfolio diversifier.

So go ahead and buy gold this Dhanteras!

Happy Diwali!

 

Warm Regards,
Divya Grover
Research Analyst

 

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