Embrace Gold Bonds this Diwali

Deepawali, the festival of lights is one of the most celebrated festivals in India. This festival embarks the victory of good over evil, hope over despair and knowledge over ignorance. It is celebrated to mark the return of Lord Ram to Ayodhya after 14 years of exile and his victory over Raavana. It is said that Lord Ram reached Ayodhya during Amavasya (night), and people of Ayodhya lit hundreds and thousands of earthen lamps to show him the way to palace. Till date this tradition has continued.

Diwali pooja without Lakshmi Pooja is rendered incomplete. People tend to buy gold/silver coins or jewelry during Diwali since it is considered auspicious. In fact it is deemed as good as inviting Shree Lakshmi herself to one’s home. Even if we talk in terms of Personal Finance, Gold adds on to diversification of one’s portfolio and is also a good hedging tool. Though, its participation in one’s portfolio should not be more than 10-15%. In current times, handling physical gold has become more of a menace. Due to security reasons one cannot keep it at home. It needs to be deposited in the bank locker which again has its own cost. Plus, it doesn’t offer any return, market rate is its only return. Physical gold is sold post melting, so one has to bear the charges of the same which will be approx. 4-6% of the final Gold price.

Why does one need to go through all this trouble for physical gold – let’s embrace Gold Bond this Diwali. What is a Gold Bond? – Sovereign Gold Bonds are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India. (source: http://finmin.nic.in/). You can buy these bonds both in paper and demat form. These bonds carry a 8 year tenor with exit options available at 5^th, 6^th and 7^th years. And, if one still wishes to sell these bonds before stipulated exit windows, he can do so in the secondary market. You can buy these bonds from Scheduled Commercial Banks and designated post offices. The best part of having these bonds is that they also offer interest unlike physical gold or even Gold ETF’s. Gold bonds offer 2.75% p.a. interest (2.5% p.a. in Series III tranche) on initial investment which is paid semi-annually. These bonds are issued in denominations of one gram gold and in multiples thereof. One can buy minimum of 1 gram and maximum of 500 grams every fiscal year. Only Resident Indians can apply for this bond. Eligible investors include individuals, HUF’s, trusts, universities, charitable institutions, etc. In addition to providing sovereign guarantee, gold bonds are also cheaper than physical gold which has making charges and Gold ETF which has recurring annual management charges of up to 1% of net assets. The biggest advantage which Gold bond has on its sleeve is its taxability. These bonds are exempt on Capital Gains Tax. If one holds these bonds till maturity he will get this advantage.  Since these bonds are linked to the market the maturity amount will depend upon the gold prices prevalent at the time of maturity.

The sixth tranche of Gold Bonds 2016-17 has already been launched and is available for investment till 2^nd November, 2016. Due to festive season, Government is offering a discount of Rs. 50 per gram and the bonds are being offered at Rs. 2,957 per gram. The additional interest being offered for this tranche is 2.5% p.a. payable semi-annually. Since, these bonds have higher liquidity risk in comparison to physical gold or ETF’s one should link them to their long-term financial goals and go ahead. You can get more details with regards to this bond at:  https://rbi.org.in/

Charu Hastir, CFPCM is founder of www.theriteplan.com. Rite plan is an online financial planning portal created to achieve a single objective of providing easy and Do It Yourself Financial Planning to netizens. Rite Plan is wholly owned by Tikkun Olam Financial Planning Services LLP. Please visit: https://theriteplan.com/index.php?route=common/home/