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This Diwali Sovereign Gold Bond Trumps ETF and Jewellery

If you wish to invest in gold, there is absolutely no doubt that Sovereign Gold Bond gets the top slot.

Close on its heels, at the 2nd spot, is the Gold ETF (Exchange Traded Fund).

And jewellery comes at a distant (distant) 3rd and last place.


Jewellery purchase involves 'uncertainty in price', 'uncertainty in purity', 'uncertainty in safe-keeping'; and a host of other problems.

As such, it is no match to the "best price", "best purity" and "best security" of the Sovereign Gold Bonds and Gold ETFs.

And, between the Bonds and ETFs, Bonds have the upper hand... but that's due to Govt's favouritism.

Govt. issues these Bonds. It is also the authority to make the tax rules. So, it has given the Bonds an unfair advantage

As discussed later, certain tax exemption has been granted to the Gold Bonds. But, the same has not been extended, to Gold ETFs and Jewellery.

Besides, Govt. is also paying you interest on your Gold Bond holdings. 

In others words, there is no level playing field between the Govt. (Gold Bonds) and the Private players (Gold ETFs and Jewellery).

And the winner is... Sovereign Gold Bond. ETF is 2nd, while Jewellery comes 3rd.

Of course, Gold ETFs and Jewellery can be bought on any working day; whereas Gold Bonds are issued from time to time.

Therefore, in view of the coming Diwali season, Govt. has announced its latest Public Issue of the Sovereign Gold Bonds.

Salient features of the same are detailed below.

Product Name: Sovereign Gold Bond 2016-17 – Series III.

Eligible Investors: Only for the resident Indian entities (individuals, HUFs, trusts, universities, charitable institutions, etc.)

Application acceptance dates: Oct 24 to Nov 2, 2016 (Bonds will be issued on Nov 17, 2016)

Pricing: Rs.2957 per gram of gold [Nominal Value Rs.3007/gram Less Discount of Rs.50]

[Nominal Value is based on previous week’s (i.e. Oct 17 to 21, 2016) average closing price of gold, of 999 purity, as per India Bullion and Jewellers Association Ltd. (IBJA). For this Series III, the Govt. has decided to offer a discount of Rs.50 on the nominal value.]

Interest rate: 2.50% p.a. (payable semi-annually) on the initial value of your investment

[IMPORTANT: For this Series III, the Govt. is offering 0.25% LOWER rate of interest. Till now, all issues of Sovereign Gold Bonds were at 2.75% interest rate.]

Investment limit: Minimum 1 gram and Maximum 500 grams per person per financial year (based on self-declaration)

Tenor: These are 8-year bonds (with an early exit option from the 5th year onward, on the interest payment dates only)

Where to buy: Banks, Designated Post Offices, National Stock Exchange of India / Bombay Stock Exchange and Stock Holding Corporation of India (either directly or thru' agents)

Issuer: Reserve Bank of India on behalf of the Government of India

Denomination: In multiples of gram(s) of gold, with a basic unit of 1 gram

Mode of Payment: Demand Draft, Cheque or Electronic Banking (and also Cash, up to Rs.20,000 only)

Form: Govt. of India Stock Certificate. Can also be converted into demat form. 

Joint holding: Permitted (maximum investment limit of Rs.500 gms applies to the first applicant only)

Redemption pricing: Based on the previous week’s (Mon to Fri) average closing price of gold, of 999 purity, as per India Bullion and Jewellers Association Ltd. (IBJA)

(a) Interest income is taxable as per IT Act 
(b) Capital Gains on redemption (when the Bonds are held till maturity) is exempt from tax (only for individual investors)
(c) Capital Gains on transfer (when the Bonds are sold in the secondary market) is eligible for indexation benefit, if the holding period exceeds 3 years.

Collateral: Allowed as collateral for loans; with the same Loan-to-Value ratio as mandated by RBI on the physical gold.

KYC:  Voter ID, Aadhaar card/PAN or TAN /Passport i.e. same as for purchase of physical gold

Liquidity: Would be traded on the stock exchanges and RBI's NDS-OM (Negotiated Dealing System-Order Matching Segment).

Commission: 1% of the subscription amount shall be paid to the receiving offices, who shall share at least 50% of the same with the agents procuring the business.

(Not to be ignored) ENDNOTE
Tradition is good. Therefore, if you have to buy gold this Diwali, sure go ahead.

... marry it with modernity.

... forget jewellery and gold coins / bars; invest in these Sovereign Gold Bonds
... as many financial advisors (including me) have often warned, just invest only a token amount
... don't let your portfolio become too heavy on gold (and property)
... make 'ample' room for financial assets (more particularly the mutual funds)

Your children will be much richer when, a decade later, you gift them equity mutual funds instead of the (traditional) gold or property.

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