GLITTER AND SHINE: As an investment instrument, SGBs combine features of physical gold and G-secs
Indians have historically been among the largest buyers of gold in the world, and they currently remain the second largest buyers of gold (India imports 700 - 900 tonnes of gold per annum). Out of the worldwide jewellery consumption (which is approximately 50% of the total gold demand), the majority is estimated to be from India. Sovereign Gold Bonds (SGBs) aim to combine some of the best features of physical gold and Government Securities (G-Secs); and help build the nation in the process.
Indians have traditionally favoured gold due to their preference for physical assets, as a hedge against inflation and due to the cultural/emotional comfort derived from gold's perceived value of being an asset that can be quickly sold on a rainy day. Indians also tend to flaunt gold as a symbol of wealth and status.
Limitations of physical gold
The limitations of physical gold as an investment avenue are the lack of an income stream, risks and costs relating to storage of gold and the need to transact with gold dealers in person (as compared to online transactions for financial assets and certain forms of gold investments).
Features of SGBs
SGBs were launched by the Reserve Bank of India in 2015, to mobilise gold savings (into productive financial assets), while providing added benefits to consumers as compared to physical gold. SGBs are G-Secs (bonds) issued by the RBI on behalf of the Government of India, that are denominated in grams of gold.
The most attractive feature of SGBs is that they pay a fixed interest rate of 2.50% per annum and their redemption price will be linked to the price of gold at maturity.
SGBs are issued at multiple intervals every year. They are sold through offices, branches and/or net banking platforms of nationalised banks, scheduled private banks, designated post offices and the authorised stock exchanges or their agents. SGBs can be traded on stock exchanges, if they are held in dematerialised form.
Why SGBs have become popular
SGBs have gained popularity due to the following benefits and advantages over physical gold:
They eliminate the risks and costs of storing physical gold They provide a regular income stream (interest at 2.50% per annum) besides the capital gain on gold prices, thus returns on SGBs are higher than physical gold They are issued by the Government of India and thus they carry virtually no credit / repayment risk They eliminate the risk of buying poor quality physical gold as they are financial assets with prices linked to the price of gold of 999 purity (24 carat) published by IBJA (India Bullion and Jewellers Association) They SGBs offer limited liquidity for the first five years due to the existence of a secondary market and thereafter they are redeemable Due to exchange tradability, SBGs can be purchased at a discount in the secondary market (in case of price dips) and returns can be further increased
Who should invest in SGBs
SGBs are well suited for investors looking to acquire gold with an eight-year horizon (ideally) or to achieve some diversification from equity and debt products and with (limited) annual interest on the same. Since the secondary market for SGBs are not highly liquid, investors should ideally be prepared to hold SGBs till maturity. Investors with shorter investment horizons (and the ability spread their purchases over a few weeks or months) can look to purchase SGBs at discounted prices on the secondary market through their brokers or online trading platforms.
The writer is managing partner & head - Family Office, of ASK Wealth Advisors. The views and opinions expressed in this article are personal
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