The fifth quota of sovereign gold bonds (SGBs) has been issued by the RBI (Reserve Bank of India) for the financial year 2021-2022, opening on August 9, 2021.
What’s on offer?
The SGBs are issued at Rs 4,790 per bond to the investors. Each bond’s price is based on the price of one gram of gold. A discount of Rs 50 is offered on applying using a digital payment mode. For such investors, the price would be Rs 4,740 per bond. The price is determined by the average prices of gold for the last three days. The price at which the bonds are offered and the prices of SGB traded in the secondary market are almost identical.
With a maturity period of 8 years, Investors also have the option of pre-mature redemption after five years on the day interest is paid. The interest rate of 2.5% is offered, paid semi-annually. The investors can buy the bonds from Stock Holding Corporation of India Ltd (SHCIL), designated post offices, and National Stock Exchange and Bombay Stock Exchange.
SGBs are preferred by professional investors as compared to buying regular gold. This is because the investors are immune to pay any tax on the interest by holding the bonds until maturity. Instead, the interest earned on these bonds is credited directly to your account.
What does not work?
The liquidity of these bonds is relatively low. As a result, bonds of many series are either sold at a cut or are not traded at all.
Yet, the number of bonds traded on stock exchanges are on the rise. Due to the high demand, in some cases, the SGBs are traded at a premium price compared to the price of gold.
Should you invest?
Gold is a perfect way to beat inflation over the long term. According to RBI, estimated inflation for FY22 is 5.7 per cent which was expected to be 5.1 per cent earlier. In the last year, gold prices saw a surge of 24.43 per cent. Nonetheless, in the first quarter, the profit made by the investors was generous. In the past, as US Federal Reserve talked about tightening the monetary policy, there was a fall in the market value of gold. Although it is uncertain when this might happen, markets and investors expecting the same in the last quarter of FY2021-2022.
The investment in gold is expected to rise. Gold will continue to be one of the investors favourite commodities. The central banks and the people will once again buy gold after the pandemic situation improves worldwide. This might increase the gold prices to Rs 60,000 per 10 grams in the next year.
SGBs are profitable and can be bought in small quantities around the year to avoid timing risk. This particular issue closes on August 13, 2021, and bonds will be issued on August 17, 2021