What is Sovereign Gold Bond scheme? Know about benefits and risks of investing in it

Sovereign Gold Bonds are issued by the Reserve Bank of India multiple times a year, on behalf of the Indian government, as substitutes for holding physical gold

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Many of us have come across the term Sovereign Gold Bond while scanning the headlines. But most of us remain unaware of the scheme, its benefits and who can invest in it. The Reserve Bank of India is set to open the second tranche of the Sovereign Gold Bond (SGB) scheme 2022-23 from 22 August. The issue price and other details of the SGB will be announced later. As the time for the next subscription approaches, here is a handy explainer about what Sovereign Gold Bonds are, how we can invest in them and the benefits and risks associated with these bonds.

What are Sovereign Gold Bonds?

SGB ​​or Sovereign Gold Bonds are issued by the Reserve Bank of India multiple times a year, on behalf of the Indian government, as substitutes for holding physical gold. These bonds are basically government securities denominated in grams of gold.

Who can invest in the bonds?

According to the RBI, any person defined as a resident of India under the Foreign Exchange Management Act, 1999 is eligible to invest in SGB. Eligible investors include individuals, trusts, universities, Hindu Undivided Family and charitable institutions. Individual investors who change their residential status from resident to non-resident after purchasing the bond may continue to hold the SGB until early redemption/maturity.

The RBI pays an interest of 2.50 percent (fixed rate) per annum on the amount of initial investment in the Sovereign Gold Bond. The interest on these bonds will be credited semi-annually to the investor’s bank account. The last interest payment will be payable on maturity along with the principal amount.

What is the minimum and maximum investment in SGBs?

The SGBs are issued in denominations of one gram of gold, and its multiples thereof. The minimum investment required is one gram. For individuals and Hindu Undivided Family (HUF), the maximum investment is 4 kg. For trusts and other entities, the limit is 20 kg per fiscal year (April – March). More details can be found on the RBI’s website.

What are the entry and exit options?

The tenor of the SGB is eight years, but investors are given the option to exit the bond after five years from the date of issue on coupon payment dates.

What are the risks and benefits of investing in SGB?

The risk is that the investor could face capital loss if the market price of gold falls. However, investors will not face losses in terms of the units of gold which they have paid for.

As for benefits, investors are assured of getting the prevailing market price, even if they exit prematurely. The risk and costs of holding physical gold are eliminated if you invest in SGB. The investors will be free from issues like making charges and purity of gold. They are also assured of the market value of gold at the time of interest payments and maturity.

How can we invest in Sovereign Gold Bonds?

The bonds are sold through recognized stock exchanges, scheduled commercial banks, designated post offices, the RBI and the Stock Holding Corporation of India Limited (SHCIL). Once the subscription opens, you can visit the website of the RBI or the issuing banks/SHCIL offices/designated Post Offices/agents for SGBs.

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