Why these schemes?
India is the 2nd largest importer of Gold after China. For the government, these schemes will reduce the amount of gold that will have to be imported into the country. This reduces the account deficit and contributes to our GDP.
Not only this, the scheme is also expected to mobilise idle gold lying with people, give a fillip to the gems and jewellery sector by making the metal available from banks on loan and reduce the reliance on imported gold.
Therefore, the government has all the reasons to make this scheme as attractive as it possibly can, even if it means giving you some real incentive to invest in Gold.
Not only this, the scheme is also expected to mobilise idle gold lying with people, give a fillip to the gems and jewellery sector by making the metal available from banks on loan and reduce the reliance on imported gold.
Therefore, the government has all the reasons to make this scheme as attractive as it possibly can, even if it means giving you some real incentive to invest in Gold.
What is in the schemes?
There are primarily 2 schemes:
(1) Gold Bond Scheme
This scheme is primarily for the regular investors in Gold.
Under the gold bond scheme, up to 500 grams worth of bonds per annum can be bought by an individual with lock-in of five-seven years and appropriate interest so that they are protected from volatility.
You can buy these bonds in lieu of buying physical gold or in lieu of buying gold ETF units.
The bonds are denominated in grams of gold, and will be available in a variety of amounts starting from 5 grams. The investment is simple to understand. Instead of buying 10 grams of gold as investment, you buy a 10 gram gold bond, which will be available from banks, post offices and other places.
After five years, you redeem the bond and get whatever is the value of 10 grams of gold. The difference is that you will also get an additional interest amount, over and above the gold value.
These Gold bonds can be used as collateral for loans and will be traded on exchanges. However, the extent of trading is still a question mark.
If the price of gold has fallen from the time that the investment was made, the depositor will be given an option to roll over the bond for three or more years.
The bonds will be available both in demat and paper form. They will be issued in denominations of 5, 10, 50, 100 gms of gold or other denominations.
(2) Gold Monetisation Scheme
(1) Gold Bond Scheme
This scheme is primarily for the regular investors in Gold.
Under the gold bond scheme, up to 500 grams worth of bonds per annum can be bought by an individual with lock-in of five-seven years and appropriate interest so that they are protected from volatility.
You can buy these bonds in lieu of buying physical gold or in lieu of buying gold ETF units.
The bonds are denominated in grams of gold, and will be available in a variety of amounts starting from 5 grams. The investment is simple to understand. Instead of buying 10 grams of gold as investment, you buy a 10 gram gold bond, which will be available from banks, post offices and other places.
After five years, you redeem the bond and get whatever is the value of 10 grams of gold. The difference is that you will also get an additional interest amount, over and above the gold value.
These Gold bonds can be used as collateral for loans and will be traded on exchanges. However, the extent of trading is still a question mark.
If the price of gold has fallen from the time that the investment was made, the depositor will be given an option to roll over the bond for three or more years.
The bonds will be available both in demat and paper form. They will be issued in denominations of 5, 10, 50, 100 gms of gold or other denominations.
(2) Gold Monetisation Scheme
This is a new deposit tool meant to help people earn returns on the precious metal lying idle in bank lockers.
The gold deposited through this scheme will be re-circulated in the economy, helping cut imports. Not to miss, the Gold has to be melted before it can be useful for the economy. You should be ready to part with your emotional attachment to the jewellery designs that you have been holding your gold in.
The amount deposited under the Gold Monetisation Scheme will fetch interest, much like a savings bank account, although the returns will be far lower.
You will need to get a purity certificate from an approved Assaying and Hallmarking Centre and open a Gold Savings Account. You will then deposit the gold with a bank, which will transfer it to a warehouse, and choose a tenure which can range from one-three years (with rollover in multiples of one year to 12-15 years).
Like a fixed deposit, breaking of lock-in period will be allowed in either of the options and there will be a penalty on premature redemption (including part withdrawal).
When it comes to redemption, if you are a short-term investor, you will have the option to redeem it either in cash or the equivalent quantity of gold. But medium- and long-term deposits will only be redeemed in cash.
The gold deposited through this scheme will be re-circulated in the economy, helping cut imports. Not to miss, the Gold has to be melted before it can be useful for the economy. You should be ready to part with your emotional attachment to the jewellery designs that you have been holding your gold in.
The amount deposited under the Gold Monetisation Scheme will fetch interest, much like a savings bank account, although the returns will be far lower.
You will need to get a purity certificate from an approved Assaying and Hallmarking Centre and open a Gold Savings Account. You will then deposit the gold with a bank, which will transfer it to a warehouse, and choose a tenure which can range from one-three years (with rollover in multiples of one year to 12-15 years).
Like a fixed deposit, breaking of lock-in period will be allowed in either of the options and there will be a penalty on premature redemption (including part withdrawal).
When it comes to redemption, if you are a short-term investor, you will have the option to redeem it either in cash or the equivalent quantity of gold. But medium- and long-term deposits will only be redeemed in cash.
How do we compare it with Gold Mutual Funds?
Up till now, for investors in non-physical gold, gold funds were the most logical and hassle-free choice. Now, the new government bonds may turn out to be a good competitor. These bonds will track the price of gold, much like the Gold ETFs do, plus an extra interest earning on top of that. To top it up, there are no charges or fees with these bonds.
What are the tax implications?
Buying and selling these bonds is likely to have exactly the same tax treatment as physical gold. However, it is better to wait and let the exact details be announced.
Positives of the Scheme
- You will earn an extra buck in the form of interest. Though the interest may be minimal (close to 1%), but it is still better than what you have been getting till date, which is a big zero. In fact, you might have been paying money from your pockets to rent a gold locker. The exact returns that the two instruments will offer will only be announced after a few weeks. As a result, we are advising people to wait for the details to come out.
- There will be no risk of purity, or of physical security since these are sovereign bonds which come with assurance from Reserve Bank of India.
- These bonds will generate higher returns in comparison to any of the gold mutual funds, for the simple reason that there will be no fund management charges.
- Bonds can be used as collateral for loans.
Negatives of the Scheme
- The biggest and the most significant drawback of such a gold bond over gold mutual funds is its lack of liquidity. The bonds will have a frozen tenure, probably of five and seven years, while gold funds are redeemable at three days notice at any point.
- The other critical area is the unit size. The Gold Mutual Funds can deal in units of 1 gram each, while the minimum ticket size for the bonds is rather large at 5 grams equivalent. For a small regular investor, this might be a bottleneck.
- Sovereign Bonds can only be purchased by resident Indians.
- There is an annual cap of 500 grams per person, which means big investors may not be interested.
Summary
For those who are investing for a period as long as a few years, the higher returns of the government bonds plus the added interest are a clear advantage. However, the lack of liquidity and unit size seems to spoil the party. Personally, I am adopting a wait and watch approach till some more clarity emerges on taxes. I would also be keen to watch the extent of trading on national stock exchanges, which might just provide these well intended schemes, the required liquidity.
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The book "From the Rat Race to Financial Freedom" has many such investment concepts explained in a very simple and uncomplicated manner, especially in the Indian context.
Cheers
Manoj Arora
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