Last Updated on July 3, 2020 by Gopal Gidwani

Mahesh is a 32 year old individual who aims to build a diversified portfolio for himself for future. He has already diversified his investments by investing in FDs, PPF, NSC, mutual fund SIPs and equities. In order to obtain optimum diversification, he wants to expand his investments in gold in order to hedge his portfolio against inflation.

Gold has always held an attraction among investors. When it comes to investing in gold, traditionally, investors had no other option but to invest only in gold jewellery or gold coins. But today, investors have a choice to invest in gold coins, gold ETFs, gold funds of funds and even Sovereign Gold Bonds.

In this article we will specifically explore the benefits of investing in Sovereign Gold Bond over other gold investments – jewellery, gold coins, gold ETFs and gold funds of funds.

What is Sovereign Gold Bond (SGBs)?
Sovereign Gold Bond (SGBs) is the bonds issued by RBI on behalf of Government of India and are denominated in units of 1 gram of gold and in multiples thereof. These bonds have fixed maturity period of 8 years during which an investor earns a fixed interest rate of 2.5% annually on these bonds. Investing in the unit/s of these bonds or holding these bonds is equivalent to investing in gold or holding gold because the value of bond units moves in tandem with the price of gold. At the time of maturity/redemption, the maturity/redemption amount equivalent to number of units held, along with the interest is credited in the investor’s bank account.

Example of SGB purchase, holding period and redemption
a) Purchase: Mahesh buys 1 Sovereign Gold Bond (SGB) unit equivalent to 1 gram of gold. For buying this 1 SGB unit, Mahesh will have to pay the price of 1 gram of gold as published by the RBI during the subscription period.
b) Issue of Holding Certificate: In return for the price paid, Mahesh will be allotted 1 Sovereign Gold Bond (SGB) unit in the form of a Holding Certificate. Please note that no physical gold will be allotted to Mahesh.
c) Holding period: During the holding period, the value of the 1 Sovereign Gold Bond (SGB) unit will move in tandem with the price of 1 gram of gold as published by RBI.
d) Maturity redemption: On maturity, Mahesh can redeem the Sovereign Gold Bond (SGB) unit in Indian Rupees. The redemption price of 1 Sovereign Gold Bond (SGB) unit shall be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewellers Association Limited. The interest and redemption proceeds will be credited to Mahesh’s bank account.

Issue price of SGB units: The nominal value of Sovereign Gold Bond is in Indian Rupees and is fixed on the basis of simple average of closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited, for the last 3 business days of the week preceding the subscription period.

For investing in gold, SGBs provide the investors with an alternative option other than to invest in physical gold or Gold ETFs. As SGBs are secured by the Government of India, the investment in gold via SGBs makes it one of the safest ways to invest in gold.

The main features of the SGBs are:

Features	Details
Issued by	SGBs are issued by the RBI on behalf of the Government of India
Denomination	SGBs are issued in denominations of 1 gm of gold and in multiples thereof.
Eligibility	Any Resident Individual, HUFs, trusts, universities and charitable institutions can invest in SGBs. SGBs can also be applied for in name of minor by their Parents/Guardians. If residential status of an individual changes to Non Resident, and he is a holder of SGB, then he is allowed to hold the SGB till its early redemption/maturity.
Joint Holding	Sovereign Gold Bonds can be issued to joint holders as well, provided that they satisfy the eligibility criteria mentioned above.
KYC	PAN card number is mandatory for applying for SGBs.
Period of issue	SGBs are issued for a period of 8 years.
Premature withdrawal	Premature withdrawal of SGBs is allowed from 5th year onwards. The investor seeking premature withdrawal has to make an application for it before the interest/coupon due date. The amount along with interest is then credited to investor’s bank account.
Interest rate	SGBs pay a fixed interest rate of 2.5% per annum, which is credited semi-annually in the investor’s bank account.
Issue of Application form	The application for SGBs can be issued by Post Office, banks and Stock Holding Corporation of India (SHCIL), NSE and BSE. The application form can also be downloaded from the RBI website.
Holding Certificate	Investor will receive Certificate of Holding from the date of issue of SGB. Investor can also hold SGBs in demat form. For Holding Certificate in demat form, the investor will have to mention it in the application form.
Minimum Investment	Minimum amount that can be invested by in SGB is 1 gram of gold
Maximum Investment	Maximum amount that can be invested in SGBs is a) Individuals – 4 kg b) Hindu Undivided Family (HUF) – 4 kg c) Trusts and similar entities - 20 kg In case of joint holding, maximum investment limit of 4kg will apply only to first holder.
Issue price	RBI will issue Press Release stating issue price of the Bond before the opening of new issue/tranche. Price of SGB Bond is fixed in Indian Rupees on the basis of simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Limited (IBJA) for the last 3 business days of the week preceding the subscription period.
Mode of Payment	Investor can choose any of the following modes of payment: a) Cash payment upto ₹ 20,000 b) Cheque / Demand draft c) Electronic Fund Transfer (EFT)If an investor applies online and makes the payment using digital mode, then he will have to pay ₹ 50 per gram less than the nominal value.
Redemption	On maturity, the redemption amount along with interest will be credited to bond holder’s bank account. The value of the bond will be redeemed in INR and the redemption price shall be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewellers Association Limited.
Trading of bonds	SGBs held in demat form can be traded on recognised stock exchanges, but after the completion of 5 years from the date of issue.
Transfer of bonds as gift	SGBs can be gifted or transferred in the name of another individual, provided he/she fulfils eligibility criteria.
Collateral	Sovereign Gold Bonds can be offered as collateral against loan from banks, financial Institutions and Non-Banking Financial Companies (NBFC).
Tax Implications	TDS is not applicable on SGB. Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted, if held till maturity. The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.

Source: https://m.rbi.org.in/Scripts/FAQView.aspx?Id=109

How to invest in SGBs?
Now that we have understood the features of Sovereign Gold Bond, the next question that arises is - How can we invest in the SGBs?

For investing in Sovereign Gold Bond, one has to first wait for the announcement of issue of Sovereign Gold Bonds by RBI on behalf of Government. Once the issue is announced, investor will have fill the application form and make the payment, and then wait for allotment of bond.

Let us discuss this process in detail:
1) Issuance of Sovereign Gold Bond
At the start of Financial Year 2020-21, the RBI had announced that the Government of India will be issuing SGBs in six tranches between April to September. The dates of the issuance of SGBs are as follows:

Sovereign Gold Bonds issuance calendar

Sr. No.	Tranche	Date of Subscription	Date of Issuance
1	SGB 2020-21 Series I	April 20-24, 2020	April 28, 2020
2	SGB 2020-21 Series II	May 11-15, 2020	May 19, 2020
3	SGB 2020-21 Series III	June 8-12, 2020	June 16, 2020
4	SGB 2020-21 Series IV	July 6-10, 2020	July 14, 2020
5	SGB 2020-21 Series V	August 3-7, 2020	Aug 11, 2020
6	SGB 2020-21 Series VI	Aug 31 – Sep 4, 2020	Sep 08, 2020

Source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11864&Mode=0

The application form is then made available to investors via different channels for subscription. Application form for SGB can be obtained either directly or via agents from:

• Designated Post Offices
• Scheduled Commercial Banks
• Stock Holding Corporation of India (SHCIL)
• Recognised Stock Exchanges – NSE and BSE
• RBI website

2) Filling up the Application Form
Once the investor receives the Application ‘Form A’, he/she needs to fill up the following details:

a) Applicant individual details
Investor needs to provide full name, address and contact details in the application form. Any Resident Individual, HUFs, trusts, universities and charitable institutions can invest in SGBs.

SGBs can also be applied for in name of minor by their Parents/Guardians. In such cases, the PAN of the Guardian has to be filled in the form.

In case of joint holding, the details for the joint holder have to be provided.

b) Mode of payment - Cash, Cheque or Electronic Transfer
Investor can choose any of the following modes of payment:
i) Cash payment upto ₹ 20,000
ii) Cheque / Demand draft
iii) Electronic Fund Transfer (EFT)

If an investor applies online and makes the subscription payment using digital mode then he will get discount of ₹ 50 per gram.

c) Details of grams of gold applied for
The applicant has to clearly mention the details of the grams of gold applied for in the application form. Sovereign Gold Bond (SGB) is issued in denominations of 1 gm of Gold and in multiples thereof. Minimum amount that can be invested by an investor in SGB is 1 gram of gold.

Maximum amount that can be invested in SGBs is

• Individuals – 4 kg
• Hindu Undivided Family (HUF) – 4 kg
• Trusts and similar entities - 20 kg

In case of joint holding, maximum investment limit of 4 kg will apply only to first holder.

d) PAN details
PAN card is the mandatory document needed for application of Sovereign Gold Bond. Applicant also needs to provide details of PAN, Passport, Aadhar or voter ID number (any of these) in the application form.

e) Bank details for receiving interest and redemption
Interest is paid semi-annually to the bond holder in his / her bank account. Hence the applicant has to provide bank account details in which the interest and the maturity amount at redemption will be credited.

f) Depository participant details (NSDL or CDSL), if the investor wishes to hold the bond in demat form
In case, the applicant wishes to hold the certificate in demat form, then in such cases, he/she has to provide Depository Participant details (NSDL/CDSL), DP/Client ID.

3) Acknowledgement Receipt
Once the receiving officer accepts the application form, they will issue an acknowledgement receipt to applicant mentioning, application form number, date of submission, etc.

4) Issue of holding certificate
Once all the above steps are completed, Certificate of Holding is issued to investor on the date of issuance of the SGB.

Certificate of Holding can be collected by the investor from the issuing channel where he/she had submitted the application form. He/she can also receive the Holding Certificate directly from the RBI on email, if email address was provided in the application form.

Comparison of Sovereign Gold Bond with other gold investments
As discussed above, investors now have an option to invest in gold in various ways. They can either buy gold coins, or invest in gold ETFs, gold funds or Sovereign Gold Bond (SGBs). In this section we will attempt to compare these products among themselves in order to understand which way of investing in gold is better as compared to others.

Gold coins
Traditionally, gold coins have been the most popular means for investment in gold. Investment in gold coins has become much safer in the recent years with the introduction of BIS (Bureau of Indian Standard) hallmark by Government of India that certifies the purity of gold.

Gold coins are generally available in 0.5 gram to 50 gram denominations. However some jewellers may offer lower denominations as well. Gold coins can be easily purchased from jewellers, banks, SHCL, e-tailers, etc.

PAN card in mandatory for investment is physical gold (gold coins, gold bar and gold jewellery) above Rs. 2 lakhs. Receipts of the transaction need to be securely stored by the investor.

Selling gold coins has some limitation as the banks, SHCL, and e-tailers do not buy back gold. They only sell them. Hence gold coins can only be sold to jeweller, where the jeweller will offer the market value or near market value of the gold coin. The jeweller may deduct charges (if any).

Selling of gold coins attracts capital gains tax. If the gold coins are sold within 36 months, then it will attract short term capital gains tax, and above 36 months, it will attract long term capital gains tax. Also, while buying the gold, one has to pay GST and making charges (if any) as well, that results in increase in investment cost of gold.

While debating the futility of investment in physical gold by Indians, one has to understand that investment in gold coins is not always done for the sole purpose of investment. Gold is classified as superior good, where the attraction of gold does not diminish with high prices. An individual may buy gold coins, so that in future he / she can use it to buy/make jewellery in future. Gold is also a popular gift item among family members during marriage, birth ceremonies, birthdays, festivals and other occasions.

Gold ETFs
Gold ETFs have become quite popular among investors over the years and the main reason is ease of investment and high liquidity.

Gold ETFs are mutual fund schemes that invest in gold bullion of 99.5% purity. In other words, the units of gold ETF mutual fund that you invest in are backed by purchase of physical gold by the mutual fund that is offering the ETF.

It is necessary to have a demat account for investment in Gold ETF. Once the investor invests in Gold ETF, they can be easily traded through the stock exchanges – BSE and NSE.

The minimum investment in Gold ETFs is of 1 unit which is equivalent to 1 gram. As the price of units held in Gold ETF is backed by actual price of physical gold, hence investment in Gold ETF can be considered to be similar to investment in physical gold, where the gold is held in electronic form by the investor. Hence a gold ETF investor does not have to worry about storage risk and storage cost associated with physical gold.

Gold ETFs do not attract wealth tax. However income tax rules for capital gains tax is similar to physical gold. If Gold ETF is held for less than 3 years, then short term capital gain tax will be applicable and if it is sold after 3 years then long term capital gains tax will be applicable.

Investment in Gold ETF is less expensive as compared to investment in physical gold as there is no storage and insurance cost in Gold ETF. There is no entry and exit load in Gold ETFs. The best part of investment in Gold ETF is high liquidity as they can be easily traded on the stock exchanges. They can also be offered as collateral against loans from banks. Couple of limitations with Gold ETFs include mandatory requirement of demat account and you cannot start a SIP in Gold ETF

Gold Funds of Funds (FoFs)
Gold funds of funds are mutual fund schemes that invest in gold indirectly via Gold ETFs. The difference between Gold ETFs and Gold fund of funds is in the way in which one can invest in gold. Gold fund of funds are commonly referred to as gold mutual funds or gold funds.

As compared to Gold ETFs, it is not necessary to hold a demat account for investing in gold through gold funds. The investor has a choice to invest in a gold fund either directly through a mutual fund company or through a demat account.

As the investment is done in the form of mutual fund units, one can even start investing in a gold fund via the SIP route. The SIP can be of minimum Rs. 1000 or higher/lower as specified by the fund scheme. Compared to other forms of investment in gold (coins, ETFs, SGBs), the gold funds offer lowest investment route to investors. In other forms of gold investment (coins, ETFs, SGBs), the minimum investment is 0.5 or 1 gram which costs more than Rs. 2000 or Rs. 4000 at today’s prices. However, in a Gold Fund, an investor can start investing from as low as Rs. 1000. Having said that, the cost of investing in gold via Gold Funds is comparatively expensive due to higher expense ratio, exit load and other management expenses.

For the investor, there are no storage risks associated with investment in Gold Funds, as gold is held in electronic form.

If Gold Fund investment is held for less than 3 years, then short term capital gain tax will be applicable and if it is sold after 3 years then long term capital gains tax will be applicable. This is similar to physical gold and Gold ETFs.

Comparison of features of different gold investment options

Comparison features	Gold Coins	Gold ETFs	Gold Funds	Sovereign Gold Bond (SGB)
Investment channel	Can be purchased from banks, jewellers, SHCL, e-tailers etc.	Purchased from mutual fund or through stock exchange. Demat account is needed	Can be purchased from mutual fund house	Can be purchased from banks, SHCL, Post Offices etc.
Purity of Gold	Purity is not standardised and may differ	Purity is high. It is standardised.	Purity is high. It is standardised.	Purity is high. It is standardised.
Investment risk	Risk can be high as purity of gold may differ among jewellers. You should insist on hallmark / purity certificate	Risk is low as it is held in electronic form and gold purity is certified	Risk is low as it is held in electronic form and gold purity is certified	Risk is low as purity is certified and it is backed by sovereign guarantee
Minimum investment	No limit	1 gm of gold	Minimum SIP may start from Rs. 1000	1 gm of gold
Maximum Investment	No limit	No limit	No limit	Individuals – 4 kg
Investment cost	High as it includes GST and making charges. You may also need to incur storage and insurance costs	Low as investment is made through demat account and there is no exit load. There is no storage and insurance cost.	Higher as compared to Gold ETFs as it includes higher expense ratio, exit load and other management expenses. There is no storage and insurance cost.	Low, as only the cost of gold has to be paid. You can get discount for online payment. There is no storage and insurance cost.
Return	May be less than actual price of gold when sold to jeweller	Get the same amount as the price of gold	Returns are lower than gold ETFs, because of high expense ratio, exit load and other management expenses	High as investor earns interest in addition to getting the price of gold on maturity
Interest earned	None	None	None	2.5% annually
Tax treatment	Both short term capital gains and long term capital gains are taxable	Both short term capital gains and long term capital gains are taxable	Both short term capital gains and long term capital gains are taxable	Interest earned on bonds is taxable. However long term capital gains are exempted from taxation, if held till maturity
Storage cost	You may have to pay bank locker rent and insurance cost for physical storage	There is not storage cost as gold is held in electronic form	There is not storage cost as gold is held in electronic form	There is not storage cost as gold is held in electronic form
Storage risk	High as gold is stored in physical form	Low as gold is held in electronic form	Low as gold is held in electronic form	Low as gold is held in electronic form
Trading	Difficult as compared to others	Can be easily traded on stock exchanges	Cannot be traded on stock exchanges. Units can be sold back to mutual fund	Can be traded on stock exchanges (after completion of 5 years from issue date) if in demat form
Liquidity	High, as it can be sold to jeweller at anytime	High as it can be traded in stock exchanges	High as it can be redeemed with mutual fund based on that day NAV	Premature redemption allowed after 5 years from issue date
Collateral	Can be offered as collateral against loan from banks	Cannot be offered as collateral against loan from banks	Cannot be offered as collateral against loan from banks	Can be offered as collateral against loan from banks
Tenure	No fixed tenure	No fixed tenure	No fixed tenure	Issued for 8 years, premature redemption allowed after 5 years

Conclusion
As we have discussed above, an investor can invest in gold through various means like gold coins, gold ETFs, gold funds and SGBs. Here is a quick recap of all gold investment options:
1) Gold coins involve making charges, storage and insurance costs, purity is not standardised and attract capital gains tax.
2) Gold ETFs have specified purity and do not involved storage and insurance costs. But Gold ETFs involve additional costs of demat account (compulsory) and brokerage charges. In Gold ETFs, the minimum investment is of 1 gram and there is no SIP option.
3) Gold Funds offer SIP option with lower minimum investment starting from around Rs. 1,000. There is no demat account requirement with Gold Funds but they have higher fund management charges and may also have exit load.
4) Gold SGBs have specified purity, and there is no requirement for demat account. There is no entry load, exit load and fund management charges. They are exempted from capital gains tax. They offer 2.5% interest p.a. with no storage costs. They offer sovereign guarantee by the Government of India.

So, to conclude, Sovereign Gold Bonds (SGBs) are a better option for gold investment as compared to gold coins, gold ETFs and Gold Funds.

To know about the step-by-step process on how to accumulate gold for your child’s wedding or any other occasion, check this article: How to accumulate gold for your child’s wedding

In case of any queries please comment in the section below or write to me at [email protected]

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