How To Buy Sovereign Gold Bonds (SGB) from Secondary Markets
Gold is one of India’s most popular investment options because of its spiritual and cultural importance. However, when it comes to diversification of portfolios across different asset classes, gold has seen a steep rise in price, especially since 2019. For example, one gram of 24-karat gold was available for around ₹3,200 in 2019, which is more than ₹6,000 per gram now, and has seen a rise of over 90% in such a short period.
You can invest in gold in many ways, such as physical gold, gold mutual funds, gold exchange-traded funds (ETFs), digital gold or sovereign gold bonds. This blog will discuss SGBs and the benefits of buying them from secondary markets.
What are Sovereign Gold Bonds?
Sovereign Gold Bonds (SGBs) are a type of government security that is issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are issued in denominations of one gram of gold and are linked to the market price of gold. SGBs are a popular investment option in India that offer several benefits, such as safety, liquidity, tax efficiency, high returns, and government backing. SGBs are linked to the market price of gold and also offer 2.5% p.a. of fixed interest (payable half-yearly) on the face value (issuance price) of SGB.
Points to Consider Before Buying SGBs from the Primary Market
SGBs are issued by the RBI (also called primary issuance) in various tranches throughout the financial year.
- You can purchase SGBs from commercial banks, post offices, online portals, and stock exchanges.
- A discount of ₹50 per gram is offered to investors who apply for bonds online.
Points to Consider Before Buying SGBs from the Secondary Market
SGBs can also be purchased from the secondary market, through the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
- The price of SGBs on the secondary market is determined by demand and supply, similar to any other securities.
- SGBs are typically traded at a discount to the spot price of gold.
1. Minimum Investment in SGB
The minimum investment amount varies for individuals and institutions
- The minimum investment in SGBs is 1 gram.
- The maximum investment in SGBs is 4 kilograms per financial year for individuals and 20 kilograms per financial year for trusts, universities, and charitable institutions.
2. Sovereign Gold Bonds Interest Rate
- The interest on SGBs is paid half-yearly in April and October.
- The interest rate is fixed at 2.5% per annum.
3. Sovereign Gold Bond Tax Benefits
- SGBs are exempt from capital gains tax if held for a period of 8 years.
- SGBs can be used as collateral for loans.
Benefits of Buying Sovereign Gold Bonds from the Secondary Market
- Gold at Discount: Like any other securities, the price of Sovereign Gold Bonds (SGBs) on stock exchanges is determined by the forces of demand and supply. However, due to their low trading volume, SGBs trade at a discount to the spot price of gold. This presents a great opportunity for investors to purchase the highest purity of gold at a lower price than the prevailing market rate. In fact, buying SGBs from the secondary market can prove to be a cost-effective way to invest in gold, especially for those who missed out on the primary issuance.
- Taxation: One major advantage of investing in Sovereign Gold Bonds (SGBs) is the tax benefits they offer. If an investor redeems SGBs at maturity or during the pre-mature window directly with the Reserve Bank of India (RBI), no taxes are levied on the capital gains. However, taxes must be paid on the interest received. The same applies when purchasing these bonds from the secondary market with a residual maturity.
- Interest: Investors also get 2.5% p.a. interest on the face value (issuance price) of SGB even if they buy SGB from the secondary market.
How to Find the Best SGB Deal in the Secondary Market?
SGBs are traded on stock exchanges like BSE and NSE. Regularly monitoring the prices of SGBs can give you a fair idea of the current market rate and the discounts being offered.
Presently there are 63 SGBs are listed on stock exchanges, you can track the prices of all SGBs from here.
While purchasing SGBs from the secondary market you have to consider one important factor of interest, SGBs provide a simple interest of 2.5% every six months, and the interest is provided on the issue price (face value) of the bonds and not on the purchase price in the secondary markets, and that is the reason you should not settle for the lowest trading price while purchasing SGBs from the secondary market.
Process of Buying SGBs in The Secondary Market
- You can find the discounted SGB/high-yielding SGB here.
- Search the SGB scrip code in your demat account and place a buy order.
- The bonds will be credited to your demat account within T+1 working day of the transaction.
Should You Purchase SGBs from the Secondary Market?
Buying SGBs from the secondary market can be lucrative, The price of SGBs can vary based on the remaining maturity period. It is advisable to choose the bonds with a longer residual maturity period, as they often trade at a better discount than those with a shorter maturity period.
Buying SGBs from the secondary market can be a good option for investors looking to add gold to their portfolio at a lower price.
The introduction of Sovereign Gold Bonds has made gold investment much more accessible. The investment is open in primary and secondary markets both. You can notice a low trading volume of SGBs in the stock exchanges. However, an investor may get many benefits if they purchase it from the secondary market, such as tax benefits. The benefits increase when an investor buys an illiquid series and a low trading price compared to the current market price or new issue price.
Should you buy SGB from the exchanges at a discounted price?
If you miss the chance to apply for SGBs during the primary issuance, you can invest in them through the stock exchanges. Most SGBs are traded at a discount from the spot price in the secondary market. This is due to the poor price discovery mechanism and lack of enough liquidity. However, the fact that SGBs are traded at a discount in the secondary market shouldn’t be the only deciding factor for you to invest in SGBs. Investing might not be a good option if you can’t hold the SGBs until maturity.
This is due to two reasons. Firstly, you won’t get the tax benefit. And secondly,SGBs are traded at a discount to the spot price of gold, so you may not get the full value of your investment if you sell them before maturity.
What are the 5 key things to consider when buying SGB from the secondary market?
Here are 5 key things to consider when buying SGB from the secondary market:
1. The discount to the spot price of gold.
2. The liquidity of the SGBs.
3. The interest rate on the SGBs.
4. The maturity date of the SGBs.
5. Your own investment goals and risk tolerance.
Why should I assess the liquidity factor when buying SGBs from the secondary market?
The liquidity factor is important to consider when buying SGBs from the secondary market because it affects how easily you can sell them if you need to. If the SGBs are illiquid, you may have difficulty selling them quickly and at a good price. Therefore, it is important to assess the SGBs’ liquidity before buying them.
Can I buy SGB in secondary market and hold it till maturity?
Yes, you can buy SGB from the secondary market and hold it till maturity.
Can I sell SGB in the secondary market before 5 years?
Yes you can sell SGB before 5 years, but it will be subject to capital gains based on your period of holding.
Can I sell SGB in the secondary market before maturity?
Yes, you can sell SGB in the secondary market before maturity
What happens if I sell SGB in secondary market?
If you sell SGB in the secondary market before the completion of 1 year after investment, your gains will be charged as short-term capital gains (STCG) tax. However, if you sell SGB in the secondary market after 1 year, you will be charged capital gains at a flat 10% without indexation benefits or 20% with indexation benefits.