An update: On January 14, 2016 Government has announced that a second tranche of Sovereign Gold Bond Scheme will be launched soon. It may be worth considering these bonds if the price of the bond is close to the actual gold prices which have fallen in recent months.
While we invent frugal ways to use onions in our kitchen, our government has invented new ways of investing in gold.
Tired of seeing us hoard gold jewellery coins and biscuits, in our lockers, they now want us to buy financial assets which hold gold or use our gold possessions so that we get an opportunity to earn interest through a gold monetisation scheme.
A. Gold Bonds: You won’t buy physical gold in any form. The underlying asset in a gold bond is a gold in various denominations such as 2gm, 5gm, 10 gm or any other denomination. In an year you can buy 500gm of gold bonds. These bonds will be issued by the Government of India and sold by banks, post office or any other non-banking finance company (NBFC)
So lets say you buy 2gm worth of gold bond. If gold price is Rs 2610 per gram, you will pay roughly Rs 5220 (not accounting for commission or sales charges) for 2gm gold bond. During the tenure of the bond, which is 5-7 years, you will earn interest ranging between 2-4% (depends on gold borrowing rate internationally). The interest in form of gold quantity will be added to the 2gm that you originally invested. You can hold these bonds in physical form or in an electronic form through a demat account.
At maturity of gold bond, you will get value of 2gm plus few more grams towards interest) back. But this value will be based on the price of gold at the time of maturity. So,
You Make Money: If the gold prices go up.
You Lose Money: if the gold prices go down.
If the gold bonds get traded actively on the stock exchange, you can sell them before maturity also.
B. Gold Monetisation Scheme: Under this scheme, you can get your existing physical gold in any form, get it tested for purity at designated hallmarking centres (see list here), get a gold purity certificate and open a gold savings account with a bank. This will earn you interest (could range between 1-3%) depending on the tenure you chose-short term (1-3 yrs), medium term (5-7 yrs) or long term (12-15yrs). On maturity of the scheme, you can redeem in cash or in physical gold form.
The government has said both the schemes will be tax friendly for investors.
Gruhini Recommends: Gold Bonds are just like Gold exchange traded funds (Gold ETF) which are issued by many mutual funds. So based on the charges they will levy, you can consider gold bonds as against buying physical gold coins or biscuits.
Go for the monetisation scheme, if you have tones of gold and no place to keep it securely.
As we always reiterate, buy gold jewellery if you plan to wear it now. Dont just buy it because that’s the only thing you understand.
For a detailed analysis of what the new schemes mean for you, we would recommend reading the following post as well