The government and the Reserve Bank of India (RBI) have announced two more tranches of the Sovereign Gold Bond. The SGB Series 2023-24 Series III subscription period is scheduled from December 18 – December 22, 2023. Therefore, the date of issuance in SGB Series III is December 28, 2023.
Before investing in SGBs, it’s crucial to understand the purpose behind your gold investment. Are you aiming to achieve a specific financial goal, or is it purely for investment purposes? If it’s the former, financial planners generally recommend keeping no more than 10 percent of your total portfolio in gold. It’s advised for investors to avoid overexposing themselves to SGBs.
Window of opportunity
The availability of the bonds is not continuous throughout the year. The government will release a primary issue of various tranches of SGBs for open purchase. Typically, these issuances occur every 2-3 months, and the purchasing window remains open for about a week. For investors seeking to buy SGBs between two primary issues, the alternative is to purchase earlier issues in the secondary market at their market value.
The SGB has an eight-year tenor, with an option to redeem early after the fifth year on the date interest is due. Long-term capital gains will be taxed at 20% with an indexation benefit if the SGB is redeemed after the lock-in period of 5 years but before the maturity period of 8 years. Interest earned on SGBs is taxable as income from other sources, whereas TDS does not apply to bonds. Interest on SGBs is taxable under the provisions of the Income Tax Act of 1961. (43 of 1961). The tax on capital gains deriving from the redemption of SGB by an individual is free. Long-term capital gains deriving from the transfer of the SGB will be eligible for indexation advantages.
The initial cost of acquiring physical gold, such as bars or coins, typically amounts to around 10 percent or even higher for jewelry. In contrast, SGBs and Gold Exchange Traded Funds (ETFs) prove to be cost-effective options, as there is no entry cost for either. While Gold ETFs may have an expense ratio of around 1 percent, it remains more cost-effective to own gold in paper form compared to the expenses associated with owning physical gold.
The returns from gold can be highly volatility, particularly in the short term. It is advisable to align your gold investments with long-term goals. Ideally, goals set at least 7-8 years away are suitable, given that SGBs mature after 8 years. Investors have the option to roll over their holdings for an additional period. However, premature withdrawal is possible five years from the issue date on interest payment dates.
While exiting through the secondary market is an option, there are liquidity and price risks to consider. The quantity offered may not attract enough buyers, and the market price could be lower. These concerns are particularly relevant when attempting to exit hastily from an investment. Goals such as funding children’s education, marriage, or planning for your own retirement, which are eight years away or more, may be well-connected to investments in SGBs.
Select a long-term financial goal, and estimate its inflated cost over the planned duration. Calculate the required savings amount for this goal. Repeat this process for other long-term goals. Allocate a maximum of 10 percent of your total monthly investments for all long-term goals into SGBs. From a financial planning perspective, it is advisable to allocate a larger portion to more dynamic assets like equities, rather than gold, for achieving long-term goals. Consider each investment in SGBs as a Systematic Investment Plan (SIP) tranche. Alternatively, since SGBs are actively traded on exchanges, additional purchases can be made later to maintain portfolio balance. However, refrain from investing in SGBs when the linked goal is 2-3 years away. Allow existing SGB investments to continue, ensuring redemption at least a year before the goal to minimize gold portfolio volatility.
Returns in SGBs are market-linked and will depend on gold prices prevalent on maturity after eight years. Buy SGBs keeping your overall asset allocation in mind. Also, understand the risks.
Rather than owning gold in physical form and not earning anything on it, SGBs mean owning gold and also earning interest on it. The government has fixed interest of 2.5 per cent per annum on the investment, with no compounding of interest. The interest shall be paid in half-yearly rests and the last one shall be payable on maturity along with the principal.
It will also be important to re-invest the half-yearly interest as the amount could be low and used up unnecessary.