Sovereign gold bond is similar to Gold ETF except that its pays interest and is a fixed maturity coupon paying bond. The value of the bond depends on the price of gold. The bond has a maturity period but capital is not protected as redemption value is linked to price of gold.
ETF’s are easily bought and sold through stock exchanges while gold bond will be traded in the fixed income segment of the stock exchanges. Given that gold bonds are carrying a coupon and has the characteristics of ETFs, it should be better off that ETF but with limited floating stock, liquidity is likely to be poor and retail investors would prefer ETF’s on ease of access and liquidity.
As a part of market borrowing programme Government of India, has decided to issue Sovereign Gold Bonds for Rs 150 billion. The Bonds will be issued in tranches. The issue price of this bond has been fixed at Rs 2684 per gram of gold. The rate has decided basis of simple average of closing price for gold of 999 purity for 26th -30th October week. Bonds will be sold through banks and designated Post Offices
It is 8 year maturity and taxable bond with put option from 5th year to be exercised on the interest payment dates. Only resident Indian entities including individuals, HUFs, trusts, Universities, charitable institutions can invest in these bonds, minimum investment is 2 gram of gold (Rs 5368) and maximum will be 500 grams (Rs 1342000) in this fiscal for an entity. Coupon rate is fixed at 2.75 % payable semi-annually on the initial value of investment.
These bonds will be traded on exchanges, NDS-OM screen, also eligible for SLR
The redemption price is calculated in INR on basis of previous week’s (Monday-Friday) simple average of closing price of gold of 999 purity published by IBJA for the selling date. Bonds can be used as collateral for loans.
Advantages and Disadvantages
Investors can get exposure to gold without actually holding physical gold in the form of bars or coins. Sovereign Gold Bond (SGB) is similar to the normal coupon bearing bond where government issues bonds to borrow money from public and institutions and in turn pays the coupon. Similarly in the gold bond, the investor will lend money to the government by investing in a bond whose price will be linked to the market value of gold. The investment in the gold bond will yield interest to investor who will receive the interest on periodic basis and on maturity the bond holder will receive an amount that will be equal to the value of the underlying amount of gold as on the maturity date.