The much awaited sovereign gold bonds are slated to open from 5th November, 2015. Considering the attraction towards this asset class in India the scheme is sure to get good response from investors. But it’s an investment and much like others knowing any avenue before you decide to invest is much important so that you can make a wise decisions. So will this asset class deliver returns to you?
How these gold sovereign bonds fair when there are different options available? All this is necessary to know if you are looking to invest in gold bonds.
Let’s review what these bonds are offering to you and how attractive it is –
The Bond Features
The bonds are gold sovereign bonds which mean they will be linked to gold. These bonds will be issued by Reserve Bank of India on behalf of the government and will be open for investment till 20th November, 2015. The bonds will be finally issued on 26th November, 2015. Initially, these bonds will come with tenure of eight years. To provide liquidity to investors the bonds will have an exit option after 5th year. If anyone wish to exit then he/she can exercise the option on the interest payment dates. Individual, HUF, Trust, Universities and Charitable Institutions are allowed to invest in these bonds.
These Gold bonds will be issued in denomination of 1 gram and the minimum investment required is 2 units (2 gram of gold). The maximum one can buy is 500 gram of gold per person in one fiscal year (April to March). The Reserve Bank Of India has fixed the price of bonds at Rs. 2684 per gram which means one need to invest at least Rs 5400. Investors can buy the bonds either in physical form or in Demat account. Purchasing in Joint Names is permissible but the first holder will be considered as the primary investor which means the taxability will be on the first person in the bond certificate. These bonds are the first tranche of gold sovereign bonds and form the part of government borrowing programmes. This means you can expect more such bonds coming in future.
The bond holders will be paid a fixed interest under semi-annual option. The interest rate being offered in these bonds is 2.75% which is quite attractive as this is over and above the valuation of gold which one will receive.
The sovereign gold bonds has been linked to price of gold and so when you are redeeming or bonds mature then you will receive valuation as per prevailing price of gold. So if gold price rises you receive a higher valuation but if it falls then you bear the risk.
The bonds do not have any tax exemption. The interest investors receive will be taxed as interest income and capital gains will be taxable based on holding period of the investments. The minimum holding period for long term capital gains in gold is 3 years which will apply to these bonds.
These gold sovereign bonds along with other gold schemes are introduced mainly to counter high consumption of physical gold. The main objective of the government is to reduce dependence on the import of gold. But for investors these bonds will get compared with already present avenues for investing in gold i.e. physical gold, gold ETF and Gold Mutual Funds. On returns these gold bonds have an edge over other avenues of gold since what investors receive is capital gains from gold plus a fixed interest. The bonds will have lower cost in comparison to Gold Funds or even Gold ETF. However, if one wants to redeem before maturity then it will depend on the liquidity one gets on stock exchange where they get listed for early exit. Gold ETFs already have a higher liquidity. Also, unlike gold mutual funds you do not have option of investing systematically in gold sovereign bonds.
Should You Invest
Ideally yes, for the interest it is offering. The bonds does not incur any additional cost much like in physical gold where the there is cost of preserving the asset. Even Gold ETF have expenses associated and you cannot invest without a demat account. However, in gold bonds the risk of any upside and downside of the gold valuation lies with the investor which needs to be factored in. If gold prices fall then investors will receive lower valuation. Overall it’s an interesting product for the sheer offering of interest rate along with valuation of gold. Invest but know the risk associated and follow your asset allocation.