Sovereign Gold Bonds | 2023-2024

The Government of India, represented by the Reserve Bank of India, has officially unveiled the Sovereign Gold Bond Scheme 2023-2024 Series II, scheduled to commence on September 11, 2023. The price has been set at Rs 5,923 per gram of gold, with an additional discount of Rs 50 per gram for digital payments, making the effective price Rs 5,873.

The Sovereign Gold Bond (SGB) is open to various categories of investors, including individuals, Hindu Undivided Families (HUFs), and others. These bonds are issued at the prevailing gold market rate, with a minimum investment requirement of one gram of gold. Individual investors can purchase up to 4 kilograms of bonds within a fiscal year. SGBs provide a competitive annual interest rate of 2.5 percent, paid semi-annually based on the nominal bond value. These bonds can be securely held in a demat account. Upon maturity, investors receive the current gold market rate. SGBs are also listed on stock exchanges, and investors have the option to request early redemption after the fifth year on the interest payment dates.

Benefits of SGBs come with the assurance of a sovereign guarantee, effectively eliminating credit risk. The added appeal of interest payments is significant, as gold typically does not generate regular income. Furthermore, SGBs offer digital exposure to gold, addressing concerns related to storage costs, theft risks, purity issues, and expenses associated with safeguarding and insuring physical gold. For those seeking liquidity, these bonds can be easily sold on stock exchanges.

It's important to note that while the interest income is subject to taxation, the capital appreciation upon maturity is tax-exempt, making SGBs an attractive choice for long-term investors. If sold after three years but before maturity, long-term capital gains tax at a rate of 20 percent, post indexation, applies. Considerations to Keep in Mind SGBs are considered a less liquid form of gold investment, and their trading on stock exchanges may not always align with fair market values. Investors may face challenges when attempting to sell their holdings at or near fair value on the stock exchange.

Investing in gold provides diversification benefits to a portfolio. Given gold's low correlation with volatile assets like stocks, it can serve as a hedge during periods of market turbulence. Gold is expected to yield returns in line with inflation over the medium to long term. Rather than chasing short-term price performance, it's advisable to view it as a long-term investment.

Ghazal Jain, Fund Manager at Quantum AMC, anticipate that gold prices will remain stable in the near term. This outlook is influenced by factors such as the Federal Reserve's monetary policy and broader economic conditions.

Gold has performed well over the past year, ending on September 8, 2023, with a 16.2 percent return. However, after reaching a peak of Rs 61,346 per 10 grams on May 9, prices have corrected to below Rs 59,000 per 10 grams, potentially attracting investors. Notably, Gold ETFs witnessed net inflows of Rs 456 crore and Rs 1,028 crore in July and August 2023, according to data from the Association of Mutual Funds in India.

Experts expects that the global inflation scenario will continue to support higher gold prices in the coming months. If gold prices surpass the previous peak from May 2023, the momentum may persist, potentially driving gold prices to the range of Rs 64,000-68,500 per 10 grams over the next one to two years.

Financial planners emphasizes the tax advantages of SGBs for long-term investors. Capital gains from units of gold ETFs and gold funds acquired after April 1, 2023, are taxed based on the investor's tax bracket, making these vehicles less tax-efficient. In contrast, SGBs offer zero capital gains tax if held until maturity, making them an attractive choice for long-term portfolios.

Investors may also consider purchasing SGBs on the stock exchange while closely monitoring spot gold prices. Some traded SGBs may be priced higher than the public issue price. If you can acquire SGBs from the secondary market at a discount to the public issue price, it could be a prudent move, provided the remaining maturity aligns with your investment timeframe.

Building exposure to gold should be a gradual process, and the current dip in gold prices presents an opportunity. Many financial planners recommend allocating 5-10 percent of your portfolio to gold. If you haven't yet established a significant gold allocation, the current price correction and gold price expectations make the SGB Scheme 2023-2024 Series II an appealing option. The public issue of SGB Scheme 2023-2024 Series II is open for subscriptions until September 15, 2023.