Saturday, July 8, 2017

Soveriegn Gold Bond - July 2017.....THE BEST ONE BY FAR

I had written a lenghty article in April 2017 on the 8th Series of the issue of Sovereign Gold Bonds

Here is the link....

I have already analysed these Bonds in depth in that article.
However what makes this particular issue of Bonds particularly interesting to me is that this Bonds are GST FREE!!!!!!!
Yes. Gold is taxed at rates even lower than the LOWEST slab of 5% of GST at just 3% and is definitely attractive Taxation wise but these SGB Bonds are exempt from even GST!!

Lets see the Features of this Sovereign Gold Bond Series II in 2017-18 in detail (Overall 9th issuance)

1. Open for subscription on 10 July and closes on 14th July.

2) Bonds will have a denomination in multiples of 1 unit = 1gram of Gold
3) Tenor = 8 years (Exit option from 5th Year)
4) Price 2780 (mkt value 2830).............the Previous series was issued at 2901 (50 less than the then market value of 2951)
5)Interest 2.5% pa payable semi-annually.......The interest shall be paid in half-yearly rests and the last one shall be payable on maturity along with the principal.
6) Minimum 1 bond, Maximum 500 bonds
7) Each underlying unit will track and mirror the price of Gold
8) SGB available in Demat and physical format. (Here physical means Paper format).
9) Investments can be made in name of Minors
10) Indian Residents, HUFs, Trusts, Charitable Establishments, Universities are eligible
11) KYC required (same as when buying physical Gold) : Aadhar Card, PAN, Passport, et

1. Gold is lower than the lowest slab of 5% and is taxed only on @3%.
But, this SGB does NOT have even this LOWEST tax.
2. And, of course, additional return of 2.5% per year (not compounded, but annual)
3. Tax Free if held till maturity (physical gold is taxed)
4. No making charges
5. Purity of 999
6. Can be used as Loan collateral
7. No "fund Management Charges" compared to Gold Funds or Gold ETFs

1. Interest is taxable
2. Lack of liquidity
3. If sold before maturity, Capital Gains will be taxed at 20% (though Indexation benefit is available)
4. Reduced Interest is at 2.5% (the first 6 tranches the interest was 2.75%)

THE BIGGEST ATTRACTION for me is that this SGB gives me Interest of 2.5% pa (on base value) and mirrors the prices of Market Value of Gold.
Neither Physical Gold, Gold Mutual Funds or Gold ETFs pay any Interest.
For a Gold lover, SGB is a GOD SENT WINDOW to invest in Gold (expecially as it is GST free!!)

SGB is definitely the BEST choice if you want to buy Gold but if you want to create Wealth and become .....the asset class of Gold itself is not the right one...
Choose others like an Equity or a Real Estate
Please understand SGB is not a substitute for Equity/Fd/ppf/etc

BEFORE INVESTING IN SGB.....ask yourself WHY you are investing?
If it is for Returns = Please dont
If it is for Safety of Capital = Okay (Gold tends to give returns in line with Inflation)
If it is as an alternative to Gold = Yes....Please Go ahead
If it is to diversify = Yes. ...Please go ahead

But, do note....DO NOT....have more than 5-10% of exposure to Gold

Short term Gold looks good but long does not look very attractive...Hence stick to Asset Allocation. 

Invest ONLY if you are sure to hold till Maturity. 
Invest ONLY if your Asset Allocation indicates you need to have more Gold exposure. 

Even if we assume just a 5% increase in Gold prices in 8 years.....the returns will be much higher due to the additional interest of 2.5% bign given by Govt. 
For example, if you invest Rs.50,000 in this bond and the same will appreciate to will actually get an extra Rs.10,000 which is 2.5 pa interest that the Govt is giving you. 
So you will end up with Rs.83872/- which is a return of 6.68% CAGR

Cost wise, SGB is really very effective even compared to Gold ETFs but cost is not everything. 
You need to look at Liquidity too. 
Even if you are lover of Gold and accept the benefits that SGB does not forge tthe dictum “DONT PUT ALL YOUR EGGS IN 1 BASKET”
While this refers to Different asset could be referred to Gold too. 
Do not put everything into have bit of exposure to Gold ETFs too
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