What is Sovereign Gold Bond (SGB)? Who is the issuer?

Indians have a long-standing fascination with physical gold. Some buy it for religious reasons, while some buy it as a tradable commodity to realise profits based on the difference in cost and selling price. It has been seen that the price of physical gold has steadily increased over the years as it witnesses never-ending demand from Indians. However, for investors who see it as a tradable community and do not want to use it for personal reasons, it becomes a hassle to buy physical gold and store it until it increases in value. Hence, the Reserve Bank of India introduced the Sovereign Gold Bonds as a category in Bonds.

What are Bonds and how do they work?

Bonds are financial instruments that governments and private organisations use to raise money in the form of loans from the general public. Since bonds are used to seek loans from the public, they are included in the category of debt instruments. To understand bonds definition, it is a loan agreement between the issuer and holder, which details the terms of payment (debt servicing) and maturity. These come with a face value (principal) to be repaid on maturity and can be issued either at a discount or a premium.

Bonds are fixed tenure debt instruments issued to finance specific projects by the issuer. The interest (based on coupon rate) is paid in pre-defined instalments to the bondholder until maturity. Bond prices are inversely proportional to market interest rates and depend on various factors such as the issuer's credibility, maturity, and interest rates in the market.

Some investors buy bonds to hold until maturity and earn regular interest payments. However, some investors buy bonds as tradable security to realise profits based on the difference between the cost price and the selling price. Whoever holds the bond at the time of interest payments or maturity is paid the interest and repaid the principal amount respectively.

What is a Sovereign Gold Bond?

Sovereign Gold Bonds are a type of bond that provides an alternative to purchasing physical gold as tradable security. The Reserve Bank of India introduced Sovereign Gold Bonds in 2015 to allow investors who want to make profits based on the price fluctuations of physical gold to make profits without having to buy physical gold.

The RBI issues Sovereign Gold Bonds on behalf of the Indian government, denominated in grams of gold. When investors invest in the Sovereign Gold Bond scheme, they have to pay the issue price in cash and can redeem the bonds in cash at the time of maturity. Sovereign Gold Bonds provide regular interest payments to the bondholders and repay the investors based on the current price of gold and the held value.

Understanding Sovereign Gold Bonds

Sovereign Gold Bonds have physical gold as their underlying asset. It means that the yield of the bond fluctuates based on the price of physical gold in the market. Unlike other bonds that repay the principal amount to the investors at the time of maturity, Sovereign Gold Bonds offer cash payments based on the gold value held and the current price of gold. For example, if you invest Rs 50,000 for 10gms of gold now and the price of 10gms of gold reaches Rs 70,000 at the time of maturity, you will receive Rs 70,000 when the Sovereign Gold Bond matures.

Sovereign Gold Bonds are denominated in multiples of grams, with a minimum of one gram as a viable investment. The bonds are denominated in further multiples of grams, and the maximum investment an investor can make in Sovereign Gold Bonds is 4KG. Furthermore, Sovereign Gold Bonds pay an interest of 2.50% per annum which is paid by the government semi-annually on the nominal value with a tenure of 8 years.

Investors can exit the Sovereign Gold Bond scheme through an exit option available in the 5th, 6th and 7th year on the date of interest payment. One important thing to remember about the Sovereign Gold Bonds is that they are issued as stocks under the Government Security Act, 2006.

Features of Sovereign Gold Bonds

Here are the features of Sovereign Gold Bonds:

• Issuance: The Sovereign Gold Bonds are issued by the Reserve Bank of India on behalf of the Indian government.

• Minimum and Maximum Investment: The minimum permissible investment in Sovereign Gold Bonds is one gram, while the maximum investment is 4kg.

• Issue Price: The price for the Sovereign Gold Bonds is set on a simple average basis of the closing price of physical gold of 999 purity. The closing price is published by the Jewellers Association Limited and the India Bullion for the last three working days of the preceding week from the subscription period.

• Payment: Investors can pay to buy Sovereign Gold Bonds in cash (up to Rs 20,000), demand draft, cheque or through net banking.

• Redemption: The redemption price for Sovereign Gold Bonds is in Indian Rupees based on a simple average of the closing price of gold of 999 purity of the previous three working days published by IBJA.

• Sales Channel: Sovereign Gold Bonds are sold through Indian banks, designated post offices, Stock Holding Corporation of India Limited (SHCIL) or through recognised stock exchanges such as NSE or BSE.

What are the Benefits of Sovereign Gold Bonds

Sovereign Gold Bonds are one of the best alternatives for investors who do not want to buy physical gold but want to earn profits based on the price appreciation of physical gold. Here are the benefits of Sovereign Gold Bonds:

• Investors can use Sovereign Gold Bonds as collateral for attaining loans.
• Investors can convert the Sovereign Gold Bonds in the Demat form to ease trading.
• Sovereign Gold Bonds allow investors to cut the cost and efforts of storing physical gold.
• As the RBI issues the Sovereign Gold Bonds, investors do not have to worry about the purity of the gold or incur other costs such as making charges.
• Through Sovereign Gold Bonds, investors are assured of the market value of gold at the time of maturity along with periodical interest.
• Investors can also hold Sovereign Gold Bonds by creating a joint account with a family member.
• Parents or guardians can buy Sovereign Gold Bonds on behalf of minors to allow for capital appreciation until maturity.
• Investors can buy multiple Sovereign Gold Bonds on behalf of their family members, amounting to 4kg each.

Final Word

Sovereign Gold Bonds allow investors to do away with buying physical gold and incurring expenses to store it safely. With Sovereign Gold Bonds, investors can make profits based on the price fluctuations of physical gold without actually buying and storing the gold for future sale. Now that you know what is Sovereign Gold Bond, you can utilise the bonds to make good profits without the hassle of gold storage. Furthermore, as they are issued by the Reserve Bank of India, they are one of the safest investments across the bond’s asset class.