The seventh instalment of the Sovereign Gold Bond (SGB) scheme, which opened on February 27, will close today. The week-long window allowed trading members to invest in SGB scheme 2016-17 – Series 4.
The issue price for Sovereign Gold Bond had been fixed at Rs 2,893 per gm. This is the first SGB tranche for this calendar year. The bonds will be issued on March 17.
These bonds offer a good alternative to buying physical gold and also come with an additional interest. The investors get an added 2.5% p.a. interest on the initial amount deposited. Investors also get full exposure to gold prices to the extent of the amount deposited.
The minimum permissible investment in SG bonds is 1 gram. The maximum amount cannot exceed 500 gram per person in a financial year.
An investor gets two separate streams of returns with Sovereign gold bonds. One channel is regular interest of 2.50% p.a. on invested capital every six months. The other is in the form of capital gains at the time of redemption provided the price of gold rises by the time of redemption. These bonds can be used as collateral for loans.
Sovereign Gold Bonds are liquid assets, just like physical gold. They can be exchanged for money, albeit on loan basis, at times of financial requirement.
There are no annual recurring expenses compared with gold exchange-traded funds (ETFs). The expense ratio in ETF is around 1%. There are also no storage hassles like those involved in physical gold holding.
Sovereign gold bonds were introduced in the 2015-16 Union Budget by the Finance Minister Arun Jaitley as means to develop a financial asset which would be an effective alternative to purchasing metal gold.
The government is looking to curb the huge outflow of dollars because of Indians’ penchant of buying gold. Currently, around 20,000 tonnes of gold is imported every year by India. Just this February India’s gold imports surged to 50 tonnes, up more than 82% from the previous year.
The first tranche opened for subscription from November 5 to 20, 2015, with good response from investors. Since then, there have been six more trenches, with the last one opening between October 24 and November 02, 2016. It saw a subscription for 3,550 kg of gold worth Rs 1,067 crore.
The previous tranches – tranche I and II have recorded healthy returns close to 2% and 8%, not counting the additional interest. However, the last 4 tranches have not performed well in the market, registering losses as high as 11% instead of gains.
But since the beginning of the year 2017, gold prices have seen a rise of over 5% till March 2. This can result in greater gains in tranche VII than in the previous tranches.
The price rise is related to growing concerns in the market that the US President Donald Trump will implement protectionist policies leading to political and economic uncertainty. This will weaken the US dollar and likely to destabilize the global capital markets.
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