The latest tranche of the Sovereign Gold Bond was launched this week. Gold prices have hit record highs, peaking just above Rs 40,000 per 10 grams of 24K gold. The price has corrected fractionally. But it's clear that when there's economic uncertainty, people rush to gold. This year, the stock markets have taken a beating. Concurrently, the returns from fixed income instruments have dipped due to falling interest rates. And the bond market, too, was beset by some high-profile defaults. It's no wonder then that investors the world over have turned to gold, which has appreciated by around 30% in 2019 alone.
Naturally, investors who weren't in on the gold rush are now looking for a way to make a gain. There are multiple ways to buy gold. The obvious option is to buy gold jewellery, coins, or bars from your local jeweller. This works well if you want to own physical gold or wear it as jewellery. But if you wish to buy gold as an investment and not for consumption, the latest tranche of Sovereign Gold Bond can be your go-to option. Why do we say so? Read on for the answers.
No GST & Making Charges
Buying physical gold needs you to pay making charges over and above the price of gold. Above this, you pay 3% GST for the value of gold, and 5% GST on making charges. This significantly inflates the purchase costs, taking some sheen off the metal. The Sovereign Gold Bond, on the other hand, has no GST on the investment and since the gold is dematerialised, there are no making charges as well. It is a Central government-backed investment scheme, and it allows you to own 24K gold virtually.
The Sovereign Gold Bond Scheme 2019-20 Series IV was launched on September 9 and closes on September 13. Investors can purchase SGB in multiples of one gram, and the unit price is Rs 3890, with a discount of Rs. 50 per gram for investors applying through digital modes. Therefore, a discounted price of Rs 3840 makes the SGB immediately attractive in comparison to physical gold, which was trending around Rs 3930 as of September 11.
No Worry About Purity, Storage or Default
When you own gold digitally, you don't need to worry about safe storage or purity. The bonds purchased are stored in your demat account online. Lastly, this is a government-backed scheme. A sovereign bond runs the lowest risk of default.
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Guaranteed Interest Income
The SGB scores over all forms of gold investment through the guaranteed interest income calculated at 2.50% per annum compounded semi-annually. This means 1 gram of SGB purchased at Rs. 3890 would provide a guaranteed interest payout of Rs. 855 over and above any capital gains you may have made through the appreciation of gold prices. Even if you assume that price of gold after 8 years will not have appreciated beyond the 3900 mark, you'll still walk away with a maturity payout of Rs. 4745 per gram for your purchase in Series IV.
Another area where the SGB works better in comparison to other gold investments-even other demat gold options such as gold ETFs and mutual funds-is that your returns are completely tax-free on maturity, which happens in eight years. You're also allowed to exit the investment from the sixth year. In this case, your gains made so far will be considered long-term and taxed at the rate of 20% with indexation benefits, which therefore makes investing in SGB more tax-efficient than other gold investments.
Where To Buy
You could buy the latest 2019-20 Series IV of the SGB via online trading platforms, stock exchanges or authorised banks. Alternatively, you could also attempt to purchase previous SGB tranches in a secondary market sale via stock exchanges. Currently, with gold instruments in high demand, secondary market purchases will not be easy to make. However, if you can find a seller, you may be able to purchase SGB at a higher discount.
With the demand for gold peaking to all-time highs, it would be advisable to own a small quantity of gold as part of your investment portfolio. The thumb rule is that gold should form 5% of your portfolio. It is, after all, a volatile investment, best suited to protect you against inflation and economic uncertainty. However, I would advise against owning too much of it, because gold can also flatline for long periods of time. The best way to go about gold investment is to accumulate small quantities regularly till you reach the 5% mark.
(The writer is CEO, BankBazaar.com)