With the equity markets volatile and FD rates being low, a lot of investors flock to Gold as a product to invest in. Understandably so, given that Gold has, in the past, proven to be a hedge against inflation and the stock market.
While the “hedge against inflation” theory has been questioned in the past, it’s still always good to diversify your investments across multiple instruments, gold being one of them.
And one of the best ways to invest in Gold is with the Sovereign Gold Bond, whose first tranche for FY 2023 just opened on 20th June.
But, what is a Sovereign Gold Bond, how does it work, and who is it best for? We’ll cover the intricacies of this in this article.
An SGB is nothing but a bond issued by the RBI on behalf of the government. So you as an investor, purchase the bond for a fixed price, and then after the holding period is over, redeem it at the price prevalent then. The price of one unit of the bond is equal to the price of one gram of gold.
READ MORE: Is digital gold worth the investment?
For the current tranche, RBI has fixed the issue price of 1 gram @ Rs. 5,091. The issue price is calculated as a simple average of closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited (IBJA) for the last three working days of the week preceding the subscription period. If you buy the bond online, there is an additional discount of Rs. 50 per gram of gold that can be availed.
Let’s look at the pros and cons of SGBs.
1. It is issued by RBI - hence highly secure
2. Since you are not buying physical gold, there is no risk of adulteration or fraud
3. The best part is this - the govt pays a 2.5% interest on the issue price every year. Which means that in addition to the price appreciation of gold, you will also get a 2.5% interest every year (paid every 6 months)
However, SGBs may not be for everyone. And here's the catch - Once you buy the bond, there is a period of 8 years after which the bond will mature. Premature redemption is permitted after 5 years. (Needless to say, when you redeem the bond from RBI, you will redeem it at a price equivalent to the price of gold on that day, fixed by RBI)
READ MORE: How are gold prices decided in India?
What if you want to sell it before the 5-year period?
That’s possible too. You see, once you buy the SGB, you can trade it in the secondary market as well, which means that you can sell it to prospective buyers from your demat account any time, over the stock exchange, like you trade stocks. However, since trading depends on demand and supply (and the current liquidity for SGBs is low), the buyer may not always be willing to pay you a fair price, which is why we generally see SGBs trading at a discount in the secondary market. Upon redemption (after 5 years) though, you can be rest assured that the price of the bond will be in sync with the price of gold.
SGBs can be purchased either from RBI’s portal - RBI Direct, or from the demat account with your broker (if they have the feature)
All said and done, if you're looking at investing in gold for a period greater than 5 years, SGBs are one of the best investments to make, especially considering the fact that the equity markets right now are very volatile. By investing in SGBs, not only do you benefit from the appreciation in the price of Gold, but you also earn a 2.5% interest every year on your investment.
Ankur Jhaveri is the founder of Jackfruit - a tax and financial planning platform.