Sovereign Gold Bonds and it’s Alternatives
Our country relies heavily on the import of gold. It is estimated that around 1,000 tons of gold is imported yearly. Gold is a very precious metal and resource and has traditionally been a part of most of Indian households. Gold doesn’t get affected by inflation and in fact, has been deemed as a great hedge against inflation. In the year 2019, our country imported gold worth an estimated 2.3 trillion rupees.
Given that gold investment is considered a must for most Indian households, various modes of investments are available that revolve around gold. Sovereign Gold Bond is one such scheme among many.
1. Sovereign Gold Bond
Sovereign Gold Bond Scheme (SGB) was launched by the Government of India and is issued by the Reserve Bank of India (RBI) with an objective to let people invest in government securities denominated in grams of gold. These bonds are considered a good substitute of investing in physical gold. Main features of these bonds are mentioned below:
The Sovereign Gold Bonds also provides semi-annual interest payments to the bondholders along with providing the opportunity to earn capital gains. The current interest rate for sgb is 2.50%. The value of these bonds is measured in terms of multiples of grams of gold.
SGB is known to offer transparency in the scheme as the bonds trade in the secondary markets.
The investment gains/losses in sovereign gold bonds are linked to the gold prices in the market.
The maturity tenure of the SGB scheme is eight years. And the scheme provides an early exit option after 5 years.
How to apply for SGB?
To get the bond, people investing can apply through forms provided by certain banks, post offices, RBI's website, and Stock Holding Corporation of India. In the case of redemption, the corpus is transferred to the registered bank account of the investor.
The bonds get traded on stock exchanges and are sold by the government through banks, certain post offices and Stock Holding Corporation of India Limited.
Indian citizens are eligible for the scheme along with minors, as guardians can create accounts on their behalf.
The denomination of SGB is done in terms of gram(s) of gold and the fundamental unit is considered to be 1 gram of gold.
Limits for investment
The minimum amount of investment that can be done is 1 gram of gold and maximum amount of investment for individual investors and HUF is 4 gram of gold. For trusts and universities, the maximum limit is 20 kilograms of gold. The charge is determined by taking the average closing price of 999- purity gold for the last 3 business days. At the discretion of the issuer, the investor can trade these bonds on their own on stock exchange.
Can be used as collateral
The SGB can be used for availing loans too, certain banks accept SGB for collateral to provide loans. SGB can be converted into demat form too.
Taxation: The investment amount as well as the capital gains are exempted from tax if redeemed after 5 years or at the maturity.The interest earned will be taxable in the hands of the investors as per the applicable slab rate.
If redeemed before 5 years, the SGBs will have the same taxability as the debt mutual funds.
The latest tranche of subscription to Sovereign Gold Bonds recently closed on 10th July, 2020. Therefore, one can look into applying for a subscription in the upcoming SGB’s fifth trance of the financial year 2020-2021 which starts on August 3, 2020. The sixth or last tranche of SGBs will be open for subscription between 31st August to 4 September 2020.
Also, there are many other alternative schemes available in the market for making investments in gold.
Also Read: what is sovereign gold bond scheme
2. Physical Gold
Gold is a very important asset class to consider while investing. Purchasing gold physically has been traditionally seen as a good way to support finances. Since centuries, gold has been bought physically in different forms like jewellery, coins, gold bars, etc. Physical gold purchase is seen as a viable option as compared to buying gold in paper forms. In the present time, an online commercial market for buying gold has also started to surface through websites like Amazon, Snapdeal etc.
Indian Gold Coin Scheme was launched by the Government of India. Indian Gold Coin is the very first gold coin at national level which has an image of the Ashoka Chakra and the face of Mahatma Gandhi on either side. These Indian Gold Coins are of 24 Karat Purity with 999 quality and carry advanced anti-counterfeit characteristics and have tamper proof packaging. These gold coins are hallmarked by the Bureau of Indian Standards (BIS). These gold coins are circulated through designated MMTC stores, bank branches, post offices. These gold coins are available in quantities of 5 grams, 10 grams and can be monetised very easily. Since these coins are circulated by MMTC, they can be sold in the open market without much difficulty.
The trend of digital gold revolves around the idea of setting up a commercial market for buying physical gold, ‘GoldRush’ being one such platform offered by Stock Holding Corporation of India on their website. Such online portals let you buy or sell gold coins, gold bars, jewellery. These platforms often offer transparency. Digital gold is provided and distributed by producers or merchants like MMTC-PAMP India Pvt. Ltd and Digital Gold India Pvt. Ltd to online platforms. These issuers also assure purity of gold, MMTC-PAMP offers 24-carat gold with 999.9 purity which is considered to be the highest quality of gold. After purchasing physical gold through such platforms, you can opt to sell or get it delivered, till then the physical gold bought is kept safely within the custody of the issuer.
Redemption is available providing ease with options such as selling back to vendors, taking delivery, etc. Investors are able to purchase and accumulate physical gold in minuscule quantities.
Jewellery is also a great way of investing in gold. Usually Indian households traditionally invest into gold jewellery for it’s socio-economic worth. Many jewellers have launched good schemes for investment such as Tanishq Golden Harvest Scheme, Jos Alukkas Easy Buy Gold Purchase Plan, Malabar Gold & Diamonds Smart Buy Scheme, etc. Some of the prominent schemes are explained below.
Tanishq Golden Harvest Scheme
Tanishq Golden Harvest Scheme by Tanishq Jewellers lets the customer buy 22k gold jewellery from any store of Tanishq over the country for which customer has to invest a specific amount of money monthly for 11 months while the last investment is paid by Tanishq itself. The scheme isn’t valid for gold coins.
Malabar Gold & Diamonds Smart Buy Scheme
Malabar Gold & Diamonds Smart Buy Scheme by Malabar Gold & Diamonds lets customers purchase gold jewellery online with an option of ‘Smart Buy’ which lets customers pay in advance for choice of jewellery. For bangles, chains, bracelets, rings, etc., there is an option ‘Smart Buy + Customise’ that lets customers get a choice of given item to be customised in certain ways. However, under the gold scheme, necklaces, nose pins and pendants can’t be bought.
Prince Jewel Plus
Prince Jewel Plus is a gold scheme launched by Prince Jewellery that lets the customer buy gold in future by saving on instalments where the customer has to complete the first 11 monthly instalments. Minimum initial instalment is of Rs 1000 and after making the first instalment, it becomes compulsory to complete the rest of instalments. Instalment amount can’t be changed once fixed for the first month. Buyer also gets an option to make installments either online or offline at any store of Prince Jewellery.
Jon Alukkas Easy Buy Gold Purchase Plan
Jon Alukkas Easy Buy Gold Purchase Plan is a monthly plan for which a customer pays a monthly instalment to buy gold jewellery. Minimum amount considered for making instalment is Rs. 1000 and maximum amount considered for making instalment is Rs 1 lakh. The tenure of this scheme is around one year. Customers can purchase gold jewellery of choice via online mode or offline through any Jos Alukka store in the country.
GRT Golden Eleven Flexi Plan
GRT Golden Eleven Flexi Plan is yet another plan that is offered by GRT jewellers specially designed to help in planning. After enrolling, choice is given to select the amount for monthly payment in advance. Minimum amount required for initial advance instalment is Rs. 500. The plan also offers a pass book in order to keep track of payments. After making eleven advance monthly payments, jewellery of choice can be purchased.
Kalyan Jewellers Scheme
Kalyan Jewellers also offer an easy gold scheme that lets the customer buy gold through advance payments. This scheme can be joined at any time without any registration charges via offline mode. Online mode may add delivery charges while registering. Certain documents are required however for enrolling in this scheme. The tenure of this scheme is around one year. The minimum amount to be paid for instalment is Rs. 500 and maximum amount to be paid for instalment is Rs. 40,000. The instalment can be done in cash, cheque, demand drafts.
Physical gold has many features. Unlike schemes like SGB or others, physical gold can be kept confidential and private. There is absolutely no risk of counterparty since there is no need to fulfil any contract-based formalities of buying for which any intermediary is needed. There is no limit for buying physical gold or investing in it.
3. Gold Mutual Funds
Gold Mutual Funds are those mutual funds that indirectly invest in gold ETFs and other resources of the kind. These funds are designed to help people or institutions to invest more in electronic mode of gold. Gold Mutual Funds are considered to have two types, namely, Gold Exchange Traded Funds (ETFs) and gold saving schemes. These funds are managed passively where the fund manager usually just has a role to buy bullion gold with 99.5 purity and keep that with the scheme’s curator.
Gold Exchange-Traded Funds (ETFs) are those funds for investment which get traded through stock exchange. Gold ETFs get traded on stock exchanges. Purchasing gold ETF is often viewed as purchasing gold in electronic mode. Gold ETFs provide transparency and flexibility in the procedure. The trade of Gold ETFs is regulated by SEBI and market supervisory bodies, hence reducing the possibility of being misled. Gold ETFs offer a hassle free way for redemption. There are currently twelve Gold ETFs in the market.
Gold ETFs are considered to be very efficient for investing as compared to investing in physical gold as they do not involve margins or charges that could complicate the process and rather offer a clear procedure. Gold ETFs are considered a very reliable method of investing in gold. For someone looking to get some benefits of investing in gold for some years should look at investing in Gold ETFs as an option.
The saving funds don’t require investors to have any demat account in order to invest like Gold ETFs. These funds can be invested via a Systematic Investment Plan (SIP) route unlike many schemes. These savings funds might come along with high expense ratios. The minimum amount for investment for gold savings funds initially is Rs. 1000 where as in Gold ETFs, amount equivalent to a gram of gold. The savings fund has entry loads and exit loads unlike Gold ETFs. Gold ETFs can also be traded in the market unlike Gold Saving Funds.
Compared to Sovereign Gold Bonds (SGBs), Gold ETFs offer more liquidity and don’t have any certain lock-in period of investment. Transparency in valuing also holds another advantage for gold ETFs among the other schemes. For investors who aren’t looking for a long-term investment scheme can opt for Gold ETF instead of SGB.
4. Gold Monetisation Scheme (GMS)
Gold Monetisation Scheme (GMS) is launched by the Government of India for mobilising gold owned by households and institutions and they help in reducing the reliance of our nation on importing gold. Under this scheme, eligible parties are able to deposit gold in Gold Deposit Account of any bank except for RRBs after getting a purity check, and then get interest for the deposited asset.
The choices available for deposits are Short Term Bank Deposit (STBD), Medium Term Bank Deposit (MTBD) and Long-Term Bank Deposit (LTBD). Short Term Bank Deposit (STBD) has a duration of 1 to 3 years. Medium Term Bank Deposit (MTBD) has a tenure of around 5 to 7 years. Long Term Bank Deposit (LTBD) has a tenure of around 12 to 15 years.
After the lock-in period is completed of a certain deposit, withdrawal can be done for deposited gold. This scheme accepts a minimum deposit of 30 grams of gold in the form of coin, jewellery or bar. Earnings are exempted from different taxes such as Capital gains tax, Income tax, wealth tax. This scheme also offers the option of premature withdrawal with certain penalties for withdrawing before minimum lock-in term unlike SGB or other schemes. As mentioned earlier, this scheme has offered a choice of short-term, medium-term, long-term tenure unlike SGBs which are a long-term investment.