Sovereign Gold Bond – SGB


Recently the Prime Minister launched three schemes related to GOLD and they are as follows.
a. Sovereign Gold Coin
b. Sovereign Gold Bond scheme and
c. Gold monetisation Scheme
Let us try to understand the Sovereign Gold Bond scheme. (SGB)
a. This is ideal for those, who want to allocate some % of investments in Gold.
b. One can have around 5- 10% of their assets in Gold.
c. SGB facilitates this on a paperless mode and on a convenient mode.
d. One can currently invest a minimum of 2 gm and a maximum of 500gm.
e. KYC norms apply.
f. If you buy 10 gm at 2684, ie the price on application, the total investment comes to 26840
g. You earn an interest of 2.75% per annum on 26840 ie.  Rs 738. However this interest is taxable. Even if you are on a high tax slab, you still earn 2% tax free ie 536.
Now the question is Should one invest or buy these bonds.
a.  You can consider investing in this bonds with the following assumptions and conditions.
a.  The average return of Gold in the last 20 years has been 8.5% per annum and compounded annually.
b. This is a debt scheme and capital gains apply. However over a long period of tenure, the return can be assumed to be tax free due to indexation.
c. Now that you are getting an additional interest of 2.75% making the annualised return as 11.25% and even for high slab tax payers this works out to 10.5%
d. In addition to this, you save around 0.5%, charges one may pay for the lockers. It is assumed that one currently pays Rs 3000 per annum for a locker of 5×3 and this is likely to increase every year.
e. In addition, you can save on insurance premium etc.
One can technically get a double digit return, which is likely to be higher than the FD returns.
It is unlikely that we will be seeing higher FD interest regime if the policy makers  continue on the same path as of now.
However, It is possible that Gold may remain flat or may trade lower depending upon various factors and one needs to be appraised of this.
Please note that if Gold were to appreciate over 8% annually in the next 8 years it will be trading above 5000 per gram.
If interested do contact me.

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