What is a Sovereign Gold Bond?

Sovereign Gold Bond is a scheme that allows you to hold gold bonds instead of physical gold, offered by the Reserve Bank of India on the behalf of the Government of India. The scheme offers denominations in grams of gold and the lowest denomination is 1 gram. The issue for the scheme is done in tranches which are notified by a public notice before the issue opens.

What are the features of the Sovereign Gold Bond?

Eligibility:

In order to be eligible for buying the Sovereign Gold Bond, the investor has to be a resident Indian entity. The entity could be an individual, or a resident individual on behalf of a minor, a hindu undivided family, or a trust, University of charitable institution. A Pan card issued by the income tax department is a mandatory document for the investor.

Denomination:

The denomination for the issue of the bond is 1 gram of gold and multiples thereof.

Minimum Investment:

The minimum investment that an entity can make is 1 gram.

Maximum Limit:

The maximum amount of investment in the Sovereign Gold Bond that can be made by the investor is 4 Kg/year for individuals and Hindu Undivided Family, and 20 kg for trusts and other charitable institutions.

Rate of Interest:

A 2.5% p.a interest is offered on the amount invested.The interest amount is paid into the bank account of the entity. The last amount of interest is paid with the capital payout after the lock in period is over.

Lock in Period:

There is a lock in period of 8 years for the investment made into the scheme. There is a provision of partial withdrawal from the 5th year onwards. The exit is to be executed on the interest or coupon payment date.

Redemption:

The redemption price is fixed in INR and is calculated based on the average price of Gold of 999 purity in the previous three days from the date of redemption. The price of gold is published by the India Bullion and Jewellers Association Limited.

Why should you invest in a Sovereign Gold Bond?

The investment into the Sovereign Gold Bond can be a great investment opportunity due to the following reasons:

Price of Gold has always been the hedge against the volatility of Equity and rising inflation. Hence, they are a safe investment option that can give considerable wealth accumulation.

Owning physical gold comes with its inherent risk of safe keeping. Sovereign Gold Bond makes the ownership of gold hassle free.

The scheme comes with tax benefits, as the capital gains tax has been exempted on redemption after full tenure. The scheme offers indexation benefits to investors who get capital gains when they sell the bonds in the secondary market.

The bonds are transferable as well as tradable in the secondary markets.

What is Loan Against MF?

Mutual funds are financial instruments which invest in a portfolio of securities. These securities may be stocks, bonds, money market instruments, gold, silver and real estate investment trusts (REITs) etc. You can buy units of mutual funds; each unit represents a certain percentage of the mutual fund scheme portfolio. Mutual funds are managed by professional fund managers who manage the schemes according to the investment objectives of the schemes.

How to invest in mutual funds?

When an asset management company (AMC) house launches a new mutual fund scheme, it invites subscriptions from the public in the New Fund Offer (NFO). In the NFO period, investors are allotted units at par value (usually Rs 10). If you invested Rs 10,000 in a mutual fund scheme during the NFO period, you would be allotted 1,000 units. You need to be KYC compliant to invest in mutual funds. Your financial advisor can help you fulfil KYC requirements. Along with KYC documents, you need to provide bank details to invest in mutual funds. Investors can invest in mutual funds only from their own bank accounts.

At the end of the NFO period, the money pooled from all the investors are invested in a diversified portfolio of securities according to the scheme's mandate. After the NFO, investors can buy units of open ended schemes from the AMC at prevailing Net Asset Values (NAV). You can also redeem open ended mutual fund schemes at any time at prevailing NAVs. The redemption proceeds will be credited to your bank account on T+3 for equity funds. Investors should note that for redemptions within a certain period of time from investment exit loads may apply.

Different types of mutual funds

There are three broad categories of mutual funds:-

Equity funds:

These mutual fund schemes invest in equity and equity related securities. Equity funds have sub-categories based on the market cap segments, where the scheme may primarily invest in e.g. large cap, large and midcap, midcap, small cap, multicap, flexicap etc. The primary investment objective of equity funds is capital appreciation.

Debt funds:

These mutual funds schemes invest in debt and money market instruments. Debt funds have sub-categories based on the maturity profiles of the underlying debt or money market instruments e.g. overnight, liquid, ultra-short duration, low duration, short duration, medium duration, long duration etc. The primary investment objective of equity funds is capital appreciation.

Hybrid funds:

These funds invest in both equity and debt securities. They may also invest in other classes like gold, REITs, InvITs etc. The primary investment objective of hybrid funds is asset allocation. Different types of hybrid funds include aggressive hybrid funds, conservative hybrid funds, balanced advantage funds, equity savings etc.

Different fund categories and sub-categories have different risk profiles. Mutual funds provide investment solutions for a wide spectrum of risk appetites and investment needs. Your financial advisor can help you select the right investment option for you.

Taxation of mutual funds

Mutual funds, whose average equity allocation (i.e. where underlying assets are equity and equity related securities) is 65% or more, are treated as equity funds from tax perspective. These include all equity funds and also several hybrid fund categories. Short term capital gains (investment holding period of less than 12 months) in equity funds are taxed at 15%. Long term capital gains (investment holding period of more than 12 months) in equity funds are tax free up to Rs 100,000 and taxed at 10% thereafter. Short term capital gains (investment holding period of less than 36 months) in non equity funds are taxed as per the income tax rate of the investor. Long term capital gains (investment holding period of more than 36 months) in non equity funds are taxed at 20% after allowing for indexation. Investments in mutual fund Equity Linked Savings Schemes (ELSS) qualify for deductions under Section 80C.

What is Fixed Deposit?

Fixed deposits has traditionally been and still is the most popular investment option in India. As per RBI's report on household savings, 56% of household financial assets are invested in Bank FDs. Corporate Fixed Deposits are term deposits like bank FDs. They offer fixed rate of interest and principal amount on maturity. However, instead of banks, corporate FDs are offered by non banking financial companies (NBFCs). Corporate FDs are very popular among informed investors since offer higher returns compared to bank FDs.

Bank FD versus Corporate FD :

Rate of return

Interest rates of corporate FDs are usually higher than interest rates of banks FDs. For example current 3 - 5 year FD interest in SBI is 6.1%, whereas Bajaj Finance is offering 7% interest rate on 3 - 4 year FD. Interest rates of corporate FDs vary from one company to another depending on the credit rating of the company. We will discuss about credit ratings later.

Tenure

The tenure for bank FDs range from 7 days to 10 years. The tenure for corporate FDs range from 12 months to maximum 4 - 6 years. If you want to invest for very long tenure e.g. 8 to 10 years, then bank FD will be the only term deposit option for you. However, for shorter tenures you may consider corporate FDs.

Lock-in period

There is no lock-in period in bank FDs. Corporate FDs may have lock-in period. Usually lock-in period for corporate FDs is 3 months; you cannot make any withdrawal prior to the completion of the lock-in period. However, not all corporate FDs may have lock-in periods.

Premature withdrawals

Premature withdrawals are allowed in both bank and corporate FDs. However, penalties may apply for premature withdrawals may be applicable for both bank and corporate FDs. If you want the flexibility of making premature withdrawals, then bank FDs will be the more favourable option for two reasons (a) no lock-in period (higher liquidity) and (b) lesser premature withdrawal penalty. While bank FDs may offer more flexibility for premature withdrawals, you should weigh this as a trade-off against higher returns offered by corporate FDs.

Taxation

Taxation of bank FDs and corporate FDs is the same. The interest paid by the FD is added to your income and taxed as per your income tax slab.

Points to consider for investing in corporate FDs :

Interest rate

Different NBFCs offer different interest rates on their FDs. You should compare different FDs and make informed investment decisions. However, you should also take credit risk into consideration.

Credit risk

Credit risk refers to the NBFC's failure of meeting interest and / or principal payment obligations, exposing the investor to potential loss of income and / or capital. You should consider the credit rating of the instrument and make informed investment decisions.

Tenures

Corporate FDs may offer different interest rates for different tenures; interest rates are usually higher for longer tenures. You should decide as per investment needs.

Mode of interest pay-out

Corporate FDs offer both periodic (non cumulative) and cumulative interest pay-out. In periodic interest payout, the interest will be paid to monthly, quarterly, half yearly or yearly; the rate of interest will differ for different pay-out intervals. In cumulative interest pay-out the interest is re-invested and you get the benefits of compound interest. You should decide on cumulative or non cumulative interest depending on your investment needs.