Sovereign Gold Bonds – Features, Benefits, Risks
SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of the Government of India.
Features of Sovereign Gold Bonds
Updated price: A simple average of the closing prices of 999 purity gold for the last 3 days which is set by the Indian Bullion and Jewellers Association Limited (IBJA) is the price of a sovereign gold bond 2020.
Periodic interest pay-outs: A coupon rate of 2.5% per annum is associated with the sovereign gold bond scheme. It is disbursed to investors half-yearly.
Fixed tenor: Gold bonds are issued for a fixed period. 8 years is the maturity period of SGB. But a premature withdrawal is also available from the 5th year. This payout benefit is available for the 6th, and 7th year of bond tenor, and will be processed on the interest disbursement days. Moreover, investors can sell their securities in the secondary market at the current market rate of gold.
Resale: The SGB 2020 can be resale in the secondary market after 14 days from an issuing date which is subject to a notice published by the RBI. The current market price of gold is the price at which gold is traded. Moreover its corresponding demand and supply in the stock market also` depend on the market.
Quantity of subscription
Sovereign bonds as grams of gold can be subscribed to in the scheme. A minimum investment to the value of 1 gram of gold has to be made. The maximum limit is the value of 4kg of gold for individuals and Hindu Undivided Families (HUF). For corporations and trusts, the maximum gold for investment is equated 20kg.
The Benefits of SGB
The quantity of gold for which the investor pays is protected since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form eliminating the risk of loss of scrip etc.
The risk associated with SGB
There may be a risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold that he has paid for.