Gold has always been a favorite investment asset among Indians. Though mostly use it for Personal consumption only but still call it as Investment.
From country’s financials perspective especially India which is the largest importer of Gold, it is an unproductive asset attracting household savings away from financial markets. Importing more of gold creates pressure on country’s finances and thus impacts on Current account deficit.
To manage the public demand and gold imports, Government has recently approved Gold Monetization scheme and Sovereign gold bond scheme.
The purpose of both the schemes is to manage the transactions of gold within the country and to reduce the import bill.
Where Gold Monetization scheme is to mobilize the physical gold held by household and Institutions in the country, which can be provided as raw material to jewelers under the loan scheme. The sovereign gold bond scheme is to provide an investment avenue in the gold in paper form, which is backed by the government.
Details about gold monetization scheme have already been shared in my earlier post, here I’ll throw light on Sovereign Gold bond scheme.
Sovereign Gold bond scheme – Why?
Gold after crude oil contributes to 12% of total Import Bill of India. High import bill pressurizes the current account deficit and as all economic factors, be it GDP, Currency fluctuations, Inflation, interest rate, import, export, Current account deficit etc. are interlinked, so if one segment is negatively impacted, it is obvious that it will affect other factors and economy in general too.
As the demand of gold is difficult to control, thus these 2 schemes are launched with a view to curbing the import bill.
Sovereign Gold Bond scheme – What?
Sovereign gold bond scheme is a kind of investment in gold in a paper form. These bonds would be issued by RBI and have sovereign (Government) guarantee attached. The value of these bonds would be linked to the Price of gold. Thus if someone wants to have a gold holding in his/her investment portfolio, then rather than buying physical gold one may buy these gold bonds and take the benefit of not holding the gold in physical form and worrying about its safekeeping.
Features of Sovereign Gold bond scheme.
- This scheme is only for Indian Residents. No NRI can buy these bonds.
- Bonds would be issued in the denomination of 1,2,5,10 gm or more and no single buyer can buy more than 500 gm in one year.
- RBI reference rate will be taken for issue and redemption of bonds.
- Tenor of gold bonds would be in the range of 5-7 years, however if on maturity buyer is into losses as price of gold has gone down vis a vis buying price, then he may be allowed to extend the deposit for 3 more years
- The bonds would be listed in the stock exchange to maintain the liquidity. The bondholder can sell the bonds on exchange in case of emergency liquidity requirement.
- Interest rates on these bonds would be market determined and linked to International rate of gold borrowings. The indicative lower limit is of 2%.
- On maturity, the investor would receive the equivalent value of gold in rupee terms.
- The loan can be taken on these gold bonds.
- KYC norms will be applied as in the case of physical gold buying. For purchase above Rs 50000, Pan Card has to be shown.
- There would be no capital gain taxation at the time of maturity.
How are Sovereign Gold bonds different from Gold ETF or Gold savings fund?
Though it looks same but there are few differences in Gold ETF as compared to gold bonds.
- Gold ETFs can be bought and sold on stock exchanges only, but gold bonds would be sold by nationalized banks, Post offices or NBFCs. Though to maintain liquidity they would also be listed on stock exchanges.
- There’s no specific guarantee attached to Gold ETFs, but Gold bonds are backed by Government.
- Gold ETFs don’t have specific holding period, but Gold bonds will come with 5-7 years of holding period.
- Gold ETFs can be bought in fractions too, like 0.1 gm, but gold bonds would be issued in denominations of 1,2,5,10 gm etc.
- Gold ETFs come under capital gains taxation. So whenever you sell it out, depending on the holding period your short term and long term capital gain taxation would be decided. But in case of Gold bonds if you trade it on stock exchange then you will fall in capital gain taxation, other wise if you hold till maturity then there would not be any capital gain taxation. But yes, the interest earned every month will be taxable.
- Gold ETFs track gold prices, but gold deposit scheme besides replicating Gold prices will give interest on deposit too.
Sovereign Gold Bond scheme – How to invest?
Well, though the scheme’s structure has been announced but yet to be formally launched as a product. The bonds will be issued and redeemed by banks, Nonbanking finance companies, Post offices for a fee. Thus, you will have to wait for few more days to get the exact interest rate and fee structure of the final product.
( Scheme is getting operative in Tranches till 1/9/2016, 4 tranches has already been closed and 5th is open till 9th September’2016)
As compared to Gold Monetization scheme, to me Sovereign Gold Deposit scheme is looking more attractive. With Government backing and product to be promoted by the post office and banks, this scheme would surely gain attention. The major advantage which I can see in this scheme is the interest rate on the deposit.
If you buy physical gold, you have to make an arrangement of its safekeeping and thus incur a cost, in case of jewelry you have to bear the making charges and other costs. If you buy Gold ETFs, you can at the best track gold prices, but in case of Sovereign gold deposit bonds you invest in gold prices, with the government guarantee and also earn interest on your deposit.
How do you like this Sovereign gold bond scheme? Do share your views in the comments section below