Sovereign Gold Bonds Guide - Basics you need to know before Investing | 5paisa Article

Priyanka Sharma

17 Apr 2017

Sovereign Gold Bonds are the new-age way of investing in gold. It presents an opportunity to invest in the precious metal that is not in the form of jewelry, coins or a bar, overcoming the hassles of physical safekeeping or theft, the expenses of a locker, and getting rid of impurities in gold. At same time, it ensures better returns as compared to physical gold, besides providing interest on the amount invested.

The Gold Monetization scheme was launched by Prime Minister Narendra Modi in November 2015. It sought to bring out some 20,000 tonnes of gold from households and temples, and merge into the mainstream banking system.

In general, buying paper gold will help the government in controlling gold import, and Sovereign Gold Bonds is just a start. According to one estimate, only 3060 kg of gold have been collected from five tranches so far.

The government regularly announces tranches of Sovereign Gold Bond (SGB) Scheme, the details of which are posted on the RBI website. In its latest offering, applications for the bond issue were accepted February 27- March 3, 2017, while the bonds were issued on March 17, 2017. The scheme enjoys immense government attention as Shaktikanta Das, Secretary, Economic Affairs Department, tweeted on the latest launch, "excellent opportunity to invest and benefit from gold price appreciation".

There is little doubt that Sovereign Gold Bonds can be helpful in diversifying one’s portfolio. By investing in SGB, one can open two simultaneous streams of revenue. One from the movement of gold prices and another from fixed interest rate.

And so before you take the plunge and get involved in Sovereign Gold Bonds, here are a few pointers to keep in mind:

Alternative exposure to gold

Don't put all your eggs in one basket. It is always good to diversify your portfolio with around 10-15% invested in gold.

Sovereign Gold Bonds offer a solid alternative to take exposure to gold as it offers additional interest. There are no annual recurring expenses as compared with gold ETFs (expense ratio in ETF is 1%). The sovereign gold bonds will be sold through banks, Stock Holding Corporation of India (SHCIL), designated post offices and the National Stock Exchange of India and the Bombay Stock Exchange, which would allow early exit.

Can be used as collateral

Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank of India (RBI) from time to time.

Who can buy the Bonds

The bonds are restricted for sale to resident Indian entities, including individuals, HUFs, trusts, universities and charitable institutions. Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.

Interest rate

Investors will be compensated at a fixed rate of 2.5% per annum payable semi-annually on the nominal value.

Tenure

The tenure of the bond will be for a period of eight years. However, an exit option is available from the fifth year.

How the SGBs have fared so far

Scheme

Issue period

Issue price (Rs/gm)

Sovereign Gold Bond 2015-16

Nov 5 – Nov 20, 2015

2648

SGB 2016

Jan 18 – Jan 22, 2016

2600

SGB 2016 – Series II

March 8- March 14, 2016

2916

SGB 2016 - 17 Series I

July 18 – July 22, 2016

3119

SGB 2016 - 17 Series II

Sep 1 – Sep 9, 2016

3150

SGB 2016 – 17 Series III

Oct 24 – Nov 2, 2016

2957

SGB 2016 – 17 Series IV

Feb 27 – March 3, 2017

2893

Prices as on Feb 23, 2017

Source: RBI

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Sovereign Gold Bonds Guide - Basics you need to know before Investing | 5paisa Article

Priyanka Sharma

17 Apr 2017

Sovereign Gold Bonds are the new-age way of investing in gold. It presents an opportunity to invest in the precious metal that is not in the form of jewelry, coins or a bar, overcoming the hassles of physical safekeeping or theft, the expenses of a locker, and getting rid of impurities in gold. At same time, it ensures better returns as compared to physical gold, besides providing interest on the amount invested.

The Gold Monetization scheme was launched by Prime Minister Narendra Modi in November 2015. It sought to bring out some 20,000 tonnes of gold from households and temples, and merge into the mainstream banking system.

In general, buying paper gold will help the government in controlling gold import, and Sovereign Gold Bonds is just a start. According to one estimate, only 3060 kg of gold have been collected from five tranches so far.

The government regularly announces tranches of Sovereign Gold Bond (SGB) Scheme, the details of which are posted on the RBI website. In its latest offering, applications for the bond issue were accepted February 27- March 3, 2017, while the bonds were issued on March 17, 2017. The scheme enjoys immense government attention as Shaktikanta Das, Secretary, Economic Affairs Department, tweeted on the latest launch, "excellent opportunity to invest and benefit from gold price appreciation".

There is little doubt that Sovereign Gold Bonds can be helpful in diversifying one’s portfolio. By investing in SGB, one can open two simultaneous streams of revenue. One from the movement of gold prices and another from fixed interest rate.

And so before you take the plunge and get involved in Sovereign Gold Bonds, here are a few pointers to keep in mind:

Alternative exposure to gold

Don't put all your eggs in one basket. It is always good to diversify your portfolio with around 10-15% invested in gold.

Sovereign Gold Bonds offer a solid alternative to take exposure to gold as it offers additional interest. There are no annual recurring expenses as compared with gold ETFs (expense ratio in ETF is 1%). The sovereign gold bonds will be sold through banks, Stock Holding Corporation of India (SHCIL), designated post offices and the National Stock Exchange of India and the Bombay Stock Exchange, which would allow early exit.

Can be used as collateral

Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank of India (RBI) from time to time.

Who can buy the Bonds

The bonds are restricted for sale to resident Indian entities, including individuals, HUFs, trusts, universities and charitable institutions. Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.

Interest rate

Investors will be compensated at a fixed rate of 2.5% per annum payable semi-annually on the nominal value.

Tenure

The tenure of the bond will be for a period of eight years. However, an exit option is available from the fifth year.

How the SGBs have fared so far

Scheme

Issue period

Issue price (Rs/gm)

Sovereign Gold Bond 2015-16

Nov 5 – Nov 20, 2015

2648

SGB 2016

Jan 18 – Jan 22, 2016

2600

SGB 2016 – Series II

March 8- March 14, 2016

2916

SGB 2016 - 17 Series I

July 18 – July 22, 2016

3119

SGB 2016 - 17 Series II

Sep 1 – Sep 9, 2016

3150

SGB 2016 – 17 Series III

Oct 24 – Nov 2, 2016

2957

SGB 2016 – 17 Series IV

Feb 27 – March 3, 2017

2893

Prices as on Feb 23, 2017

Source: RBI

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