Sovereign Gold Bonds (SGBs) have emerged as a popular instrument for investing in gold in India. They are government securities denominated in grams of gold issued by the Reserve Bank of India (RBI) on behalf of the Government of India. When investing in SGBs, an important consideration is the liquidity factor and whether the bonds can be sold anytime or need to be held until maturity. Here is a detailed look at the redemption and monetization options available for Sovereign Gold Bonds:
Key Features of Sovereign Gold Bonds
Issued in denominations of 1 gram of gold with a basic unit of 1 gram.
Have a tenure of 8 years with exit option after 5th year.
Bear a fixed interest rate of 2.50% per annum payable semi-annually.
Provide capital appreciation tracking gold price movements.
Offer sovereign guarantee for principal and interest amount.
Eliminate storage and making charges associated with physical gold.
Liquidity and Exit Options After Lock-in Period
SGBs are more liquid than physical gold as they can be sold back to RBI after the lock-in period. An investor cannot redeem SGBs for cash within the first 5 years of issuance. The bonds have to be held compulsorily for a 5 year lock-in period before any redemptions or pre-mature exits are permitted.
After the mandatory 5 year holding period, SGBs can be sold back to RBI during the designated redemption windows periodically opened during 6th-8th year at prevailing gold prices. RBI announces the redemption dates and process well in advance. This offers periodic liquidity to investors after the initial lock-in.
Alternatively, investors can also sell the bonds on stock exchanges if the bonds are held in demat form. The listed price depends on market demand and may differ from RBI redemption price.
Exiting After 5 Years via RBI Redemption
RBI announces redemption dates and a 5 day window for each tranche of SGBs upon completion of the 5 year lock-in period. To redeem bonds, investors must submit redemption requests along with specified documents to the issuing banks during the redemption window.
On maturity, the bonds are redeemed in Indian Rupees based on the previous week’s simple average of closing price of gold of 999 purity published by IBJA. Redemption proceeds get credited directly to the investor’s bank account via electronic transfer.
RBI does not charge any fee/commission on redemption. However, taxes may apply on any potential capital gains made. This provides liquidity for investors after 5 years as an alternative to selling on exchanges.
Selling SGBs on Stock Exchanges
Investors can also sell Sovereign Gold Bonds on stock exchanges if they are held in demat form. Exchanges like NSE and BSE allow trading in SGBs after the lock-in period, providing additional liquidity alongside RBI redemption.
SGBs can be sold anytime during market hours at prices discovered through the exchange. Prices fluctuate based on market supply/demand dynamics and may be different than RBI redemption value. Investors need to have a demat account and bear brokerage charges on trades. But ease of transacting makes exchanges a flexible exit option.
Via Off-market Transfer
Finally, SGBs held in demat form can also be transferred off-market to any willing buyer as per RBI guidelines. This allows bonds to change ownership through private sales. Transfer charges apply and buyers must hold a demat account to receive transferred SGBs. Off-market transfers require submitting specified documents to depositories.
In summary
Sovereign Gold Bonds offer periodic liquidity after 5 years through RBI redemptions,sales on exchanges, or private transfers. Investors should factor in their investment horizon and liquidity needs when deciding to invest in SGBs as a means of investing in gold.
