Ketki Jadhav
Mar 10, 2023 / Reading Time: Approx. 7 mins
Listen to Is the Sovereign Gold Bond Scheme 2022-23 Series IV a Good Investment Opportunity?
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The Reserve Bank of India (RBI) launched the last tranche of the Series IV of the Sovereign Gold Bond Scheme 2022-23 on March 6, 2023, and will be open for subscription until March 10, 2023. The issue price for the SGB has been set by the RBI at Rs 5,611 per gram, which is higher than the previous issue price of Rs 5,409 per gram set in December 2022.
In India, gold has always held a special place in people's hearts. It is not just a precious metal, but also a symbol of prosperity and good fortune, with strong cultural and religious significance. From religious ceremonies to weddings and festivals, gold has always played an integral part in Indian culture. In recent years, gold has also emerged as a popular investment option due to its consistent rise in value over time. While physical gold has been the preferred investment option for many, the Sovereign Gold Bond Scheme offers a superior alternative with several benefits over physical gold.
In this article, we will delve deeper into the Sovereign Gold Bond Scheme, exploring its features, benefits and how it compares to physical gold. Whether you are an experienced investor or just starting, read on to learn how Sovereign Gold Bonds can help diversify your investment portfolio.
When building an investment portfolio, it is important to consider a mix of different asset classes that complement each other. While equity mutual funds can provide inflation-adjusted returns, they come with high risk and require careful selection based on individual risk appetite and investment objectives. While high-return asset classes are crucial for a winning portfolio, a good portfolio is a mix of different asset classes that complement each other.
This is where gold can play an important role as a diversification option. Gold is often considered a safe-haven asset, performing well during uncertain economic conditions and market volatility. During times of economic crisis or uncertainty, investors tend to flock to safe-haven assets like gold, which can help stabilize a portfolio. Additionally, gold has a low correlation with other asset classes like stocks and bonds, making it an effective diversification tool. Including gold in a diversified investment portfolio can help reduce overall risk and potentially improve returns.
While traditional investors may prefer buying physical gold, the Sovereign Gold Bond Scheme offers a superior alternative with several benefits over physical gold. The scheme enables investors to invest in gold without having to worry about the storage and security of physical gold. Furthermore, Sovereign Gold Bonds are also an efficient way to invest in gold as they offer interest income along with the potential for capital appreciation. Overall, investing in gold, especially through the Sovereign Gold Bond Scheme, can help diversify an investment portfolio and provide stability in times of market volatility.
What are Sovereign Gold Bonds (SGBs)?
Sovereign Gold Bonds are bonds backed by the Indian government and issued by the Reserve Bank of India (RBI). These bonds are denominated in grams of gold and serve as a substitute for holding physical gold. The scheme was launched by the Indian government in November 2015, with the aim of providing investors with an alternative to physical gold investments. Investors are required to pay the issue price in cash, and the bonds are redeemed in cash upon maturity.
What are the key features of Sovereign Gold Bonds (SGBs)?
The quantity of gold that the investors pay for is protected as they receive the ongoing market price at the time of redemption.
SGBs are considered a superior alternative to holding physical gold as they allow investors to earn from the appreciation in the gold price while also paying a fixed interest rate of 2.5% per annum payable semi-annually on the nominal value.
As a paper-based instrument, SGBs eliminate the cost and risk of storing physical gold.
The RBI or a depository holds the bonds, minimizing the risk of loss or theft, and investors can convert their holdings into dematerialized (de-mat) form.
There could be a risk of capital loss if there is a decline in the market price of gold. However, investors do not lose in terms of the units of gold that they have paid for.
SGBs are free from concerns such as making charges, GST, and gold purity associated with buying gold jewellery.
SGBs are offered for purchase to resident individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions. However, Non-Resident Indians (NRIs) and foreign institutions are not permitted to own the bonds.
SGBs have an eight-year tenure, with the option of premature redemption after the fifth year from the date of investment.
SGBs are available in denominations of one gram of gold and its multiples. The minimum investment in SGBs can be as low as one gram, while the maximum subscription limit is 4 kg for individuals and HUFs and 20 kg for trusts and similar entities per fiscal year.
In the case of a joint holding, the investment limit is applied to the first holder only.
The price of the bond is fixed in Indian Rupees based on a simple average of the closing price of gold of 999 purity published by the Indian Bullion and Jewellers Association Limited (IBJA) for the last three working days of the week preceding the subscription period.
The redemption price will be in Indian Rupees based on a simple average of the closing price of gold of 999 purity of the previous three working days published by IBJA Ltd.
SGBs are sold through commercial banks, Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Limited (CCIL), designated post offices, and recognised stock exchanges like the National Stock Exchange and Bombay Stock Exchange (either directly or through agents).
Customers are issued a Certificate of Holding on the date of issuance of the SGB. The Certificate of Holding can be collected from the issuing banks/ SHCIL offices/ Post Offices/ designated stock exchanges/ agents or obtained directly from RBI by email, provided an email address is provided in the application form.
The interest on SGBs is taxable as per the provisions of the Income Tax Act, 1961 (43 of 1961). Individuals are not required to pay capital gains tax when they redeem SGB. However, if you sell them after a lock-in period of 5 years but before the maturity period of 8 years, you will be subjected to taxes on the gains. If a person transfers their SGB, any long-term capital gains will be eligible for indexation benefits.
SGBs are eligible for trading. However, if the bonds are sold via the exchange platform, the applicable capital gains tax will be payable at the same rate as for physical gold.
The only mandatory document to invest in SGBs is the PAN Card, without which investors cannot invest in the bonds.
Investors who subscribe online and pay through online mode receive a discount of Rs 50 per gram. The redemption price will also be in Indian Rupees based on the average closing price of gold of 999 purity for the previous three working days published by IBJA Ltd.
What are the benefits of investing in Sovereign Gold Bonds 2022-23 Series IV?
1. Fixed Interest Rate:
The bond offers a fixed interest rate of 2.5% per annum on the issue price. This interest is credited semi-annually to the investor's registered bank account, making it a reliable investment option that generates regular income.
2. Capital Appreciation:
The SGB provides an opportunity to benefit from the price fluctuation of gold. Therefore, investors can benefit from capital appreciation along with the fixed interest rate.
3. Transparency:
The bond is issued by the RBI on behalf of the Government of India, making it a transparent and trustworthy investment option.
4. Cost-effective:
Since it is a paper-based instrument, the SGB eliminates the risk and cost of storage, making charges, and GST, making it a cost-effective investment option.
5. Purity:
Unlike physical gold, there are no concerns about the purity of the gold as the SGBs are issued in 999 purity.
6. Tax Benefits:
According to the Income Tax Act of 1961, the interest accrued from the bonds is subject to taxation. However, the capital gains tax arising on the redemption of SGBs to an individual is exempted. Indexation benefits will be provided for long-term capital gains arising to any person on transfer of the SGB.
7. Convenience:
The bond can be purchased online or offline, and the online purchase of the SGB through online payment mode provides a discount of Rs 50 per gram on the actual issuing price.
8. Liquidity:
The bonds can be traded over stock exchanges, making them a liquid investment option. Premature redemption is also allowed after the fifth year.
9. Collateral:
In case of an emergency, the bonds can be used as collateral for securing loans, with the same loan-to-value ratio applicable to physical gold loans.
10. Joint Holding:
The bonds can be purchased jointly, and buying the SGB in the name of a minor along with a guardian is also allowed.
Is Sovereign Gold Bond Scheme 2022-23 Series IV a good investment opportunity?
During times of economic uncertainty and rising global inflation rates, it is essential to diversify your investment portfolio with various asset classes. Many experts recommend including 5% to 10% of gold investment in your portfolio because it is a highly liquid investment option that can effectively diversify your portfolio. Gold has historically been considered a safe haven asset during times of economic uncertainty and inflationary pressures. Investing in gold can help you hedge your portfolio against such risks and can prove to be a smart and worthwhile investment option to diversify your portfolio.
Sovereign Gold Bonds offer a convenient and cost-effective way to invest in gold compared to physical gold. Additionally, the Series IV of the Sovereign Gold Bond 2022-23 provides a fixed interest rate, making it an attractive investment option.
However, take note that gold prices can be volatile due to various factors such as geopolitical tensions (such as Russia-Ukraine, US-China, and US-South Korea, among others), inflation, and economic conditions. Therefore, it is recommended to invest only a portion of your portfolio in SGB based on your risk appetite, time horizon, and investment objectives.
So, yes, it can be a wise decision to consider investing a portion of your investments in a low-risk investment option that provides portfolio diversification and a fixed interest rate -- the Sovereign Gold Bond Scheme 2022-23 Series IV, as a part of your portfolio diversification strategy after carefully considering your risk appetite and investment objectives.
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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.
As an expert with a deep understanding of investment strategies and financial instruments, let me provide a comprehensive breakdown of the concepts discussed in the article "Is the Sovereign Gold Bond Scheme 2022-23 Series IV a Good Investment Opportunity?" written by Ketki Jadhav.
Sovereign Gold Bond Scheme Overview:
1. Introduction to Sovereign Gold Bonds (SGBs):
- Definition: SGBs are bonds backed by the Indian government and issued by the Reserve Bank of India (RBI).
- Purpose: They serve as a substitute for holding physical gold.
- Initiation: Launched in November 2015 to provide an alternative to physical gold investments.
2. Key Features of Sovereign Gold Bonds:
- Price Protection: Investors receive the ongoing market price at the time of redemption.
- Interest Rate: Fixed interest rate of 2.5% per annum, payable semi-annually on the nominal value.
- Form: Paper-based instrument, eliminating storage costs and risks associated with physical gold.
- Security: Bonds are held by the RBI or a depository, minimizing the risk of loss or theft.
- Denominations: Available in denominations of one gram of gold and its multiples.
3. Subscription and Trading of SGBs:
- Eligibility: Offered to resident individuals, HUFs, trusts, universities, and charitable institutions.
- Tenure: Eight-year tenure with the option of premature redemption after the fifth year.
- Purchase Channels: Sold through commercial banks, SHCIL, CCIL, designated post offices, and recognized stock exchanges.
- Trading Eligibility: SGBs are eligible for trading on stock exchanges.
4. Tax Implications:
- Taxation: Interest on SGBs is taxable as per the provisions of the Income Tax Act, 1961.
- Capital Gains: No capital gains tax upon redemption. Indexation benefits for long-term capital gains.
5. Investment Process:
- Documentation: PAN Card is the only mandatory document for investment.
- Discounts: Investors subscribing online and paying through online mode receive a discount of Rs 50 per gram.
Benefits of Investing in Sovereign Gold Bonds 2022-23 Series IV:
1. Fixed Interest Rate:
- Interest: Offers a fixed interest rate of 2.5% per annum, credited semi-annually.
2. Capital Appreciation:
- Price Fluctuation: Provides an opportunity to benefit from the fluctuation in the price of gold.
3. Transparency:
- Issuer: Issued by the RBI on behalf of the Government of India, ensuring transparency.
4. Cost-effectiveness:
- Storage: Being a paper-based instrument, eliminates the cost and risk of storing physical gold.
5. Purity:
- Gold Quality: Issued in 999 purity, eliminating concerns about the purity of gold.
6. Tax Benefits:
- Interest Taxation: Interest accrued is taxable, but no capital gains tax upon redemption.
7. Convenience and Liquidity:
- Purchase Options: Can be purchased online or offline, with online purchases offering a discount.
- Trading: Tradable on stock exchanges, providing liquidity. Premature redemption allowed after the fifth year.
8. Collateral and Joint Holding:
- Collateral Use: Bonds can be used as collateral for securing loans.
- Joint Holding: Available for joint holding, and minors can hold bonds with a guardian.
Expert Opinion on Investment Opportunity:
Considering economic uncertainty and inflation risks, diversifying the portfolio with gold is recommended. Sovereign Gold Bonds offer a convenient and cost-effective way to invest in gold, providing a fixed interest rate. Series IV of the Sovereign Gold Bond 2022-23 is highlighted for its benefits, including a fixed interest rate, transparency, cost-effectiveness, and tax advantages. However, the expert emphasizes the need to carefully assess risk appetite, time horizon, and investment objectives before allocating a portion of the portfolio to SGBs. The article suggests that, given these considerations, investing in the Sovereign Gold Bond Scheme 2022-23 Series IV can be a prudent decision.
In conclusion, the article provides a detailed analysis of the Sovereign Gold Bond Scheme, its features, benefits, and the potential as an investment opportunity, offering valuable insights for investors at various levels of experience.
