Do you need to invest in the last tranche of sovereign gold bonds?

The first fiscal tranche of government gold bonds (SGB) issued by the Reserve Bank of India (RBI) on behalf of the government was opened on June 20th.

Investors can apply until June 24, and the date of issue of the bond is June 28. The price is fixed at ₹ 5091 per gram and online applicants will receive a discount of ₹ 50 per gram.

Is this the right time to participate in SGB 2022-23 Series I? Here are the factors you need to know before making a decision.

Golden presentation

In the current economic scenario, gold outperforms other asset classes such as equities. Although gold remained unchanged from almost a year to June 17 in US dollars, it rose nearly 6 percent in rupees. In comparison, the Nifty 50 decreased by nearly 12% during the period.

As gold thrives on uncertainty, the precious metal could make more profits by the end of this year. Factors that could help demand gold include rising inflation and fears of a recession caused by the interest rate boost cycle launched by central banks around the world.

Yellow metal has a very low correlation with other asset classes. Regardless of economic conditions, investors can hold about 10% of their portfolios in gold.

Gold is a scarce resource with a value that does not depend on the creditworthiness of its owner and has retained its value in the long run. It helps investors manage their risks from any other financial asset, thus playing a key role in creating a balanced and stable portfolio.

Why SGB

Although there are many alternative opportunities for investors to exhibit gold, SGB has its own advantages. Number one is its safety and SGB is issued by RBI. Second, there are no storage costs or charges. Third, SGBs provide an interest rate of 2.5% per annum (paid semi-annually), increasing the return on your investment. No other gold-related investment offers this form of fixed income. Fourth, capital gains are tax-exempt if held to maturity, which is eight years. SGB ​​can also be used as collateral for loans.

Keep in mind that gold bonds come with a locking period of five years. If it is sold on the secondary market after five years, low liquidity must be taken into account in the event of unloading of large quantities. Bonds from the previous series can also be offered at a discount on the secondary market. Here, too, liquidity will be a factor if you work in large quantities.

Long-term investors can subscribe to the problem, as this can give you stability and diversification.

SGB ​​facts you need to know

Sovereign gold bonds are denominated in grams of gold and one can buy only one gram. The maximum annual limit for individuals and Hindu indivisible families (HUF) is four kg, and for trusts and similar other legal entities it is 20 kg.

SGB ​​can be purchased through banks designated post offices, Stock Holding Corporation of India Ltd. (SHCIL) and authorized exchanges. You can apply online and ask for a discount of ₹ 50 per gram. Keep in mind that if you pay in cash, there is a limit of ₹ 20,000 for purchases.

Upon specific request, while applying, you can receive the bonds in demat form.

In case you want to leave after five years, you must inform the relevant financial institution through which you bought, 30 days before the date of payment of the coupon.

As long as capital gains at maturity are tax-free, interest is taxable (according to your plate). And this will not be deducted from the source, ie. TDS is not applicable. Even if you sell on the secondary market before maturity, you will benefit from indexation if you have held the bonds for more than 36 months.

At maturity, the payment will be made on the basis of the simple average closing gold price of 999 for the previous 3 working days from the payout date published by India Bullion and Jewelers Association Limited.

The SGB scheme was launched in November 2015 to reduce the demand for physical gold and to transfer some of the domestic savings used to buy gold into financial savings.

Posted on

June 21, 2022

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