Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold aimed at bringing down gold imports and providing an alternative to 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 the Reserve Bank of India on behalf of the Central Government.
Here are three important facts you should know about SGB:
PROTECTION: 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 bond 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. Gold bonds are free from issues like making changes and purity in the case of gold in jewellery form. The bonds, to be sold by banks and designated post offices either directly or through their agents, can be also be held in the demat form eliminating risk of loss of scrip.
PRICE/ INTEREST: The bonds bear interest at the rate of 2.75 per cent (fixed rate) per annum on the amount of initial investment. The bonds are issued in denominations of one gram of gold and in multiples thereof.
Minimum investment in the bond will be two grams with a maximum buying limit of 500 grams per person per fiscal year. The RBI has fixed the issue price of first tranche of gold bonds at Rs 2,684 per gram which will be open for subscription from November 5 to 20.
The price of the bonds will be fixed by the RBI on the basis of the previous week’s (Monday – Friday) simple average price for gold of 999 purity published by the India Bullion and Jewellers Association (IBJA).
Resident Indians including individuals, HUFs, trusts, universities and charitable institutions can hold these bonds.
REDEMPTION: On maturity, the redemption proceeds will be equivalent to the prevailing market value of grams of gold originally invested in Indian Rupees. The redemption price will be based on simple average of previous week’s (Monday-Friday) price of closing gold price for 999 purity published by the IBJA. Both interest and redemption proceeds will be credited to the bank account furnished by the customer at the time of buying the bond.
WHY IT’S GOOD: As investors will get returns that are linked to the market price of gold, the scheme is expected to offer the same benefits as physical gold. The big advantage is 2.75 per cent interest on bonds. They can be used as collateral for loans and can be sold or traded on stock exchanges. Bonds can be sold or transferred to other persons. Parents can buy bonds in the name of minor children. The government hopes to kill two birds with one shot: — bring down gold imports and use it as a borrowing instrument.