What Are Sovereign Gold Bonds?

Sovereign Gold Bonds, or SGBs, are government securities denominated in weight of gold, in particular grams of the yellow metal. In effect, they are an alternative way to invest in gold without actually holding physical gold.

The bonds are issued by the Reserve Bank of India (RBI) on behalf of the government of India.

SGBs Versus Physical Gold

SGBs offer a superior method compared to actually possessing gold in its physical form. This is because the risks and costs of storage of gold gets eliminated. Investors get an assurance of the market value of gold at the time of maturity and periodical interest.

They also tend to factor out making charges for say a gold jewellery that one may buy in the physical form as also concerns about the purity of the yellow metal. The bonds are held in the books of the RBI or in the demat form, thus adding to their safety and avoiding risks of losing the paper.

One risk that remains constant for both SGBs and physical gold is the risk of capital loss if the market price of gold declines.

Who Can Invest In SGBs

Any person resident in India as per the Foreign Exchange Management Act, 1999, is eligible to invest in SGBs. These include individuals, families, trusts, universities and charitable institutions. Moreover, individual investors whose residential status changes to non-resident in the future may continue to hold SGBs till they opt for an early redemption or its maturity.

One may also jointly invest in SGBs. In fact, one can also invest in SGBs on behalf of a minor.

How To Invest

One can download the application form from the RBI website. Commercial banks may also provide an online application facility, besides the more conventional form of applying at a bank branch or a post office. Each application needs to be made along with the PAN number.

An investor can have only one unique investor ID associated with any of the prescribed identification documents.

Payments can be made through cash up to Rs 20,000 and through cheques, demand draft or electronic fund transfer, for a small or large amount.

The bonds are issued in denominations of one gram of gold and in multiples thereafter. This means the minimum investment in the bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government.

An investor and a trust can buy 4 kg and 20 kg, respectively, worth of gold every year as the ceiling has been fixed on a fiscal year (April-March) basis.

What Is The Rate Of Interest and How Will The Interest Be Paid?

The SGBs bear interest at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment. Interest gets credited every six months into the bank account of the investor and the last interest will be payable on maturity along with the principal.

The nominal value of SGBs is based on the simple average of closing price of gold of 999 purity or 99.9 per cent, published by the Indian Bullion and Jewellers Association, for the last three business days of the week preceding the subscription period.

Redemption, Collateral

The investor gets notified one month before maturity regarding the upcoming maturity of the SGB. On the date of maturity, the proceeds get credited to the bank account as per the details on record.

Though the tenure of the SGB is eight years, one can opt for early encashment or redemption after five years from the date of issue on coupon payment dates. The bond can be traded on exchanges, if held in demat form.

They can also be transferred to any other eligible investor. The bonds are tradable but only SGBs held in demat form with depositories can be traded in stock exchanges. Partial transfer of bonds is also allowed.

The SGBs can also be used as collateral for loans from lenders.  The Loan to Value, Gold LTV ratio is same as the one applicable for ordinary gold loans.

Conclusion

What are gold bonds is a common question for many investors. In simple terms, it is a way to invest in gold without worrying about the risks of holding gold in its physical form. It also comes without the additional ‘making charges’ for gold jewellery. Moreover, investors in SGBs not only get a fixed rate of interest but may also benefit from the appreciation in the price of gold.

IIFL as a group allows investors to buy bonds. At the same time, IIFL Finance offers a way to monetise the SGBs just like a physical gold via a gold loan via a simple digital process. Since the bonds do not have to separately go through a physical inspection to assess the weight and purity of the yellow metal, one gets a quicker turnaround time to actually get a loan sanctioned in times of need.