Indian Economy
Sovereign Gold Bonds
- 17 Apr 2020
- 4 min read
Why in News
The Government of India (GoI), in consultation with the Reserve Bank of India (RBI), has decided to issue Sovereign Gold Bonds (SGBs) in six installments, from April 2020 to September 2020.
- This series of government-run gold bonds - the Sovereign Gold Bond 2020-21 scheme - comes at a time when the rapid spread of the deadly coronavirus (Covid-19) has disturbed the financial markets around the globe, but increased the appeal of the yellow metal (gold) as a safe-haven.
Key Points
- Sovereign gold bonds
- Sovereign gold bonds are issued by the RBI on behalf of the government. They are government securities denominated in grams of gold. They are substitutes for holding physical gold.
- The sovereign gold bond scheme was launched in November 2015. Its objective is to reduce the demand for physical gold and shift a part of the domestic savings (used for the purchase of gold) into financial savings.
- Buy and Sale: Investors have to pay the issue price in cash and the bonds will be redeemed (bought back by the issuer) in cash on maturity.
- Issue price is the price at which bonds are offered for sale when they first become available to the public.
- Apart from having a chance to gain from the rise in gold prices at the time of redemption (capital gain), the investor gets a fixed rate of interest on the investment amount throughout the tenure of the fund.
- The government will pay an interest at the rate of 2.5% per annum. The interest is payable semi-annually.
- Tenure: Sovereign gold bonds have a tenure of eight years, with exit options are available from the fifth year.
- Eligibility :The Bonds will be restricted for sale to resident individuals, Hindu Undivided Families (HUFs), Trusts, Universities and Charitable Institutions.
- The minimum permissible investment unit is 1 gram of gold.
- Channels to buy bonds:
- Investors can buy these bonds through designated scheduled commercial banks (except Small Finance Banks and Payment Banks), Stock Holding Corporation of India Limited, and designated post offices.
- One can also buy these bonds through National Stock Exchange of India Limited and Bombay Stock Exchange(BSE) Limited.
- Advantages of investing in gold bond:
- For investors it is advisable to invest in gold for portfolio diversification.
- Sovereign gold bonds are considered one of the better ways of investing in gold as along with capital appreciation an investor gets a fixed rate of interest.
- Apart from this, it is tax efficient as no capital gains is charged in case of redemption on maturity.
- Sovereign gold bonds are a good way to ensure an investment that does not need physical storage of gold.
- Disadvantages of sovereign gold bonds
- This is a long term investment unlike physical gold which can be sold immediately.
- Sovereign gold bonds are listed on exchange but the trading volumes are not high, therefore it will be difficult to exit before maturity.
