Gold as an asset class for investments has emerged as a winner over the last few years. The previous one-year return on gold investments has been around 47% and despite the disruptions caused by the Coronavirus pandemic in the last few months. This is due to its negative correlation with the equity markets. It has shown Gold’s tendency to survive economic crashes and therefore seems to be a good option for investment for the necessary diversification and subsequently a more stable portfolio.
Investment in gold can be done by way of holding physical gold and investing in Gold ETFs. Gold Funds and Sovereign Gold Bonds(SGBs). Most investors are relatively familiar with the features of these options except for the now popular Sovereign Gold Bonds Scheme. SGBs are issued by the Reserve Bank of India on behalf of the Government of India. Unlike Gold ETFs/Mutual funds, these securities are not backed by real gold and therefore only serve investment purposes. The scheme is open for investment in tranches every year in specific time frames.
Some features of Sovereign Gold Bonds include:
- Interest Rate Payments: Unlike the Gold MFs, the SGBs also provide interest payments to the holders of bonds. The government has fixed an interest rate of 2.5% p.a on the investment amount which is paid semi-annually.
- Investment Limits: The minimum amount of investment in SGBs in a financial year has been reduced to 1 gram from 2 grams in previous years. This move has made SGBs accessible to many retail investors. The maximum limit of investment is 4 Kg for individuals & HUFs and 20 Kg for trusts & similar entities.
- Bond Price: The price of the bond for buying & selling will be fixed on the basis of a simple average closing price of 999 purity gold for the last 3 business days.
- Maturity & Redemptions: The maturity of the bond will be 8 years and there is a one-time redemption window after 5 years of investment.
- Premature withdrawals( before the lock-in of 5 yrs) & transfers are allowed on requests subject to changes in tax implications.
- Taxation: The investment amount, as well as the capital gains, are exempted from tax if redeemed after 5 years or at maturity. The interest earned will be taxable in the hands of the investors.
An Investment allocation of 5–10% of the total portfolio in SGBs, depending on the investor’s risk profile, and financial objectives, would be good to bring diversification to the portfolio.
