RBI Sovereign Gold Bonds
With the prevailing situation of coronavirus, when even the most successful companies are facing highly volatile stocks, investors are attracted towards gold. But in contrast to shares, bonds or deposits, gold is an unproductive asset that does not contribute towards economic growth. To ensure that money in the economy is not drawn out of circulation, the Reserve Bank of India, went ahead with its 38th round of Sovereign Gold Bond Scheme on 20th April 2020.
Under this scheme, RBI issues Sovereign Gold Bonds (SGBs) on behalf of the Indian Government. These bonds are denominated in multiples of grams of gold and can be traded on the stock exchange by converting them into Demat form. The bond has a maturity period of 8 years, but the investors have an option to exit after the 5th year, thus providing flexibility to the investors. So, instead of holding the physical gold, investors can hold these papers and after 8 years, which is the maturity period of these bonds, and they would get what the gold is worth at that time.
Economists often advise that SGB is better than other options like physical gold or ETFs as it is less risky since it’s issued by the government and who is likely to honour its commitments and they have also exempted the SGB from taxes. Investors get to earn an additional interest of 2.5% per annum on a semi-annual basis apart from the return earned due to the change in the value of gold But the Indian investors, whose investments are based not only on returns but also emotions, prefer to buy physical gold, something that is tangible and can be shown around. Therefore there were speculations on how well these bonds would perform. On 20th April when RBI issued its first tranche out of the total 6, Rs. 822 crores were sold, the third-highest ever during a gold bond sale and highest since September 2016. The scheme was received well by the public. Part of the reason could be the inability to buy physical gold during lockdown and investors opted for the Government’s sovereign bond scheme to continue with their investing activity.