Is investing in Gold Bonds better than buying gold?

The first Gold Bond released by the Government of India has met with unprecedented success, creating a record listing with an appreciation of 20% on its very first day in the stock market.

The much hyped Sovereign Gold Bond listed at ₹ 2930 per bond (one gram of gold) on Monday. The day-long transaction witnessed an escalation to ₹ 3258, an impressive 20% appreciation. Those who bought the bond at the issue price of ₹2682 reaped a profit of 9.8% on the very first day.

What is the Gold Bond Scheme?

In November last, the Union Government launched the Sovereign Gold Bond Scheme to deter purchase of physical gold and to promote investments in Gold Bonds instead.

Sovereign Gold Bonds are government securities denominated in grams of gold, a substitute to holding physical gold.

How does it work?

The RBI issues Gold Bonds in denominations of one gram of gold and in multiples thereof.  As the price of gold rises in the open market, the price of the Gold Bonds correspondingly increases. On the contrary, when the price of gold falls in the open market, the price of Gold Bond too decreases.

Investors also have the flexibility to either sell their bonds in the stock market at prevailing market price or redeem them for cash upon maturity. The tenure of the gold bond is 8 years, but there is an option to exit after 5 years.

The investor is also paid 2.75% interest annually on the investment made in the scheme.

Advantages of investing in Gold Bonds

The most obvious advantage is not having to worry about safe storage for gold; the bond will ensure that your investment is kept in digital form. This will also save you the cost of renting a bank locker; all you need is a Demat account.

The NAV (net asset value) of gold bonds is directly proportional to prevalent gold prices, but adding to that Gold Bonds also provide better returns as investors are paid an additional 2.75% interest per annum

The chance of being cheated with the impure gold does not arise when investing in Gold Bonds. You will always get a 100% pure gold bond.

How Gold Bonds help the economy?

This Gold Bond initiative has brought down the volume of gold imports; this in turn has helped the conservation of valuable foreign exchange reserves, which have increased to 363 Billion dollars.