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Sovereign gold bond scheme opens: Should you subscribe?

Sovereign gold bond scheme opens: Should you subscribe?

17 May 2021

NEW DELHI: The first tranche of the sovereign gold bond (SGB) scheme 2021-22 opened for subscription on Monday. The issue comes at a time when gold prices are rising after dropping sharply in the last couple of months.

Those who intend to subscribe to the SGB scheme can bid for a minimum of one unit – equivalent to one gram of gold – at Rs 4,777. There will be a Rs 50 discount for prospective investors bidding online.

The issue closes on Friday, May 21. The Certificate of Bond(s) will be issued on May 25.

“The sovereign gold bond scheme offers attractive pricing and an annual return but requires the secondary market to sell if you need access to your cash. This can be quite expensive and liquidity may not be available when needed. Also, the required holding period is up to eight years so it is more like long-term bond ownership,” said Ashraf Rizvi, Founder and CEO, Digital Swiss Gold & Gilded.

Those looking subscribe to the SGBs can apply through the bank. Besides, these bonds are also sold through Stock Holding Corporation of India Limited (SHCIL), designated post offices, and stock exchanges NSE and BSE, directly or through agents.

Investors will get interest at the rate of 2.50 per cent on the money parked in SGBs. The interest will be calculated from the date of issue and will be payable every six months. Besides, they can also see capital gains at the time of redemption if the price is higher at the time.

Analysts expect late teen returns in gold in the next 12-15 months. “On the domestic front, the post-Budget gold price is a good level to enter for an immediate target of Rs 50,000 and eventually a new high of Rs 56,500 over the next 12-15 months,” said Motilal Oswal.

According to industry body Indian Bullion and Jewellers Association (IBJA), the highest purity gold traded at Rs 48,181 per 10 grams on Monday afternoon.

SGBs are government securities denominated in grams of gold. They provide a substitute to holding gold in physical form.

Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The bonds are issued by the RBI on behalf of the Government of India.

The tenor of the gold bonds will be for a period of eight years with an exit option in the fifth, sixth and seventh years, to be exercised on the interest payment dates. Besides, bonds will be tradable on stock exchanges within a fortnight of the issuance.

Benefits of subscribing to SGBs include the attractive interest rate with asset appreciation opportunity, the redemption linked to the price of the precious metal, the elimination of risk and cost of storage, the exemption from capital gains tax if held till maturity, and a hassle-free holding as it eliminates the storage cost of physical gold.