Individual investors have found Sovereign Gold Bonds (SGB) backed by the Indian government to be a viable investment choice since late 2015. Gold Bonds were created to allow investors to participate in the movement of gold prices without having to go through the inconveniences of purchasing and selling physical gold. Sovereign gold bonds have several unique characteristics that aren’t found in other gold investments. This is why:
When compared to real gold, having gold in the form of sovereign bonds makes a lot more sense. Each time you alter the type of gold in which you buy and sell jewelry, you lose 15-20% in making charges. Gold is also available in the form of gold bars and coins. Physical gold, on the other hand, has a cost in terms of storage, insurance, and security. SGBs can be held as physical certificates or in a demat account. In SGBs, the problems of gold management and translation loss are substantially avoided.
Although gold ETFs can also be kept in demat form, there is a cost associated with gold ETFs. Gold ETFs are typically purchased at the current unit price of gold, but there is a transaction cost each time you enter and exit. In addition, the annual AMC fee of 1% is deducted from the NAV of your gold ETF. SGBs, on the other hand, are not burdened with such charges. On the contrary, the government typically issues gold bonds at a discount to the average market price, providing an added benefit.
From the investor’s perspective, this is a critical point. There is no guaranteed income whether you own gold in physical form or in the form of an ETF. You only profit if the price of gold rises in the market. The SGB, on the other hand, pays 2.50 percent yearly interest to investors. Although this is a reduction from the 2.75 percent interest previously offered, it is still a fantastic method to put your idle gold deposits to work. At the very least, you are partially compensated for the risk of inflation each year. In the meantime, if gold prices rise, you will profit from the increase. The interest payments and principal redemption are both guaranteed by the Indian government, hence these bonds are risk-free.
One thing to keep in mind concerning Sovereign Gold Bonds is that they are taxed more efficiently than actual gold. Let’s look at the capital gains tax implications of SGBs. Because gold is considered a non-financial asset, capital gains are calculated based on a three-year holding period. If you sell your gold within three years, you will be subject to short-term capital gains tax at the highest rate that applies to you. Long-term capital gains are defined as sales of gold after a period of three years. It will either be taxed at a rate of 10% without indexation or at a rate of 20% with indexation. In the event of SGBs, gold bond redemption will be completely tax-free in the investor’s hands. (Gold bonds have an 8-year term and can be redeemed after a 5-year period.) If SBGs are sold in the secondary market, however, they will generate capital gains at current rates. Interest on SGBs is taxable at your applicable tax rate, just as regular interest receipts.
SGBs are a more efficient, profitable, and cost-effective way to hold gold than real gold. SGBs are not only a profitable asset that pays interest, but they also come with the assurance of a sovereign guarantee.
When there is economic volatility, geopolitical uncertainty, or a depreciation in the value of fiat currencies, gold tends to outperform other asset classes. At this point in time, we can see hints of all three in the global economy. Take a look at Syria, Afghanistan, North Korea, and Europe’s political turmoil. Gold is seen as a safe-haven investment in these uncertain times, and as a result, there is a lot of demand for it. This is something that an investor should bear in mind.
Finally, any decision to invest in gold should be considered in the context of your total portfolio mix and long-term objectives. An exposure to gold of 8-12 percent in your portfolio is typically recommended to provide a safety net for your portfolio in unpredictable times. However, unlike equities, gold does not generate long-term wealth. That should be the overarching principle that guides your gold investment decision.
Is it wise to invest in sovereign gold bonds?
In comparison to physical gold, the cost of purchasing or selling the SGB is also minimal.
SGBs are a good option for those who don’t want to deal with the headaches of storing actual gold. This is due to the fact that it is simple to store in Demat form, and no one can steal it because it is in electronic form.
Is it possible to lose money on a sovereign gold bond?
On behalf of the Indian government, the Reserve Bank of India (RBI) sells Sovereign Gold Bonds. Each bond is worth one gram of 999 pure gold.
The current gold price is reflected in the price of the bonds that are issued. A gold bond’s price is announced before it is available for purchase. As a result, we employ a basic average of gold prices over the previous three working days. The India Bullion and Jewelers Association Limited publishes a 999 pure gold price, which is factored in.
Sovereign gold bonds have an eight-year maturity. After five years, you can depart SGB by selling your bonds on the exchange.
How can I buy sovereign gold bonds?
Sovereign gold bonds can be purchased using mobile banking, online banking, or even by mailing a physical form to your bank. Sovereign gold bonds are now available for purchase through a variety of brokerages and financial platforms.
Advantages of Sovereign Gold Bonds
- Gold bonds are a safe way to invest in gold because the Indian government backs them. Furthermore, because it is a digital or paper-based method of investing in gold, it is free of the hazards associated with traditional gold jewelry.
- Returns: Gold bonds are usually issued by the government at a discount to gold’s average market price. The price of pure gold is the return of sovereign gold. As a result, when the bonds mature, you will receive cash comparable to the current gold price. In addition, the bonds will pay a fixed annual interest rate of 2.5 percent, which will be paid semi-annually. It is crucial to note, however, that this interest will be determined by the subscription fee, not current gold prices. Furthermore, unlike gold ETFs or gold funds, SGBs do not have an annual charge.
- Asset Allocation: Sovereign Gold Bonds can assist you allocate your investment portfolio’s assets. “A sovereign gold bond can aid asset allocation and is the most effective option to include gold in your portfolio.” If you have a large equity portfolio, sovereign gold bonds can help to mitigate the risk of equity investments, particularly during market downturns, according to Alok Dubey, a certified financial advisor.
- SGB has a low minimum investment, making it a cost-effective method to invest in gold. SGB requires that you deposit at least one gram of gold.
- Tax-efficient: If you redeem your bonds after their maturity period, which is eight years, there is no capital gains tax. You can obtain indexation benefits if you redeem after the fifth year.
Disadvantages of sovereign gold bond
- Long maturity period: Gold bonds have an eight-year maturity duration, which may turn off certain investors. Despite the long maturity time, this long maturity period can assist investors avoid gold price volatility.
- Only in tranches are they available: You cannot invest in sovereign gold bonds at any moment, unlike other investing options. You can buy Sovereign gold bonds on the primary market for a set length of time according to the RBI’s calendar.
- Loss of capital: Because the bond’s value is directly linked to the price of gold on international markets, your initial investment in SGB may result in a capital loss if the price of gold falls below the price of gold at which you purchased the bond. Gold, on the other hand, is a precious commodity, and the government is dedicated to keeping its price stable. Furthermore, the chances of sustaining a capital loss if you hold until maturity are minimal. However, the prospect of a capital loss cannot be ruled out.
If you want to diversify your portfolio, SGB is a good option. Furthermore, if you want to get non-physical exposure to gold, gold bonds can be a smart option.
“Gold bonds (SGB) are an excellent investment alternative, particularly for low-risk individuals. This option has numerous advantages, including cheap cost, physical risk protection, the ability to generate passive income, and the maturity amount being tax-free. Investors should be aware that a hold investment should be included in their portfolio for the purposes of hedging and diversification. Also, it should be kept to 10-15% of the whole portfolio, according to Gayatri Jagdale, Founder of Fund-Matters.
You might attempt sovereign gold bonds if you like gold as an investment or if you want to keep it secure. The sovereign gold bond is one of the greatest ways to invest in gold at the moment.
Is gold better than sovereign gold bonds?
Gold is the most sought-after asset, with social and emotional significance. It has long been a popular investment in India. With the passage of time, gold investment has undergone numerous modifications. Gold coins, jewelry, and gold biscuits aren’t the only ways to invest in gold. Digital gold has been issued by the Indian government in the form of certificates and mutual funds that can be stored in a dematerialized format.
One need not be concerned about their gold being stolen, storage costs, or purity when investing in Sovereign Gold Bonds. However, with these bonds, there may be a liquidity concern. Physical gold is widely accepted and may be sold for cash almost anyplace. SBGs, on the other hand, have a 5-year lock-in period and mature after eight years. As a result, before investing, one must weigh both options in terms of liquidity, minimum investment, and storage, among other factors.
Physical gold vs. Sovereign gold bonds: Having gold in an investing portfolio is critical for diversification. Furthermore, as compared to other investments, gold is more stable during market instability. It functions as a buffer against inflation and economic uncertainty, allowing the value of an investor’s portfolio to remain stable.
What are the advantages of owning a sovereign gold bond?
The SGB is a superior alternative to physically keeping gold. Storage hazards and expenses are no longer an issue. Investors are guaranteed the market value of gold at maturity as well as periodic interest. In the case of gold in jewelry form, SGB is free of difficulties such as making charges and purity.
What happens if a sovereign gold bond is held for eight years?
New Delhi, India: The Reserve Bank of India (RBI) announced earlier this week that the deadline for premature redemption of the Sovereign Gold Bond (SGB) Scheme is today (Wednesday, 17 November 2021).
Despite the fact that the tenor of the Sovereign Gold Bond is eight years, early encashment/redemption is permitted on coupon payment dates after the fifth year from the date of issue. If kept in demat form, the bond will be tradable on exchanges. It can also be transferred to another investor who meets the criteria.
Is SGB made of 24 karat gold?
On Monday, October 25, BI’s Sovereign Gold Bond (SGB) plan 2021-22 – series VII goes live, and will run through October 29. Investors will be able to invest in the RBI SGB scheme for the next five days, with the issuance date set for November 2, 2021. SGB VII’s issuance price has been set at Rs. 4,765 per gram. The bond’s nominal value will be determined by the simple average closing gold price for gold of 999 purity reported by the India Bullion and Jewellers Association Ltd (IBJA) for the last three working days of the week preceding the subscription period. The Sovereign Gold Bond (SGB) is a virtual form of 24 carat gold investment.
Is it possible to keep the sovereign gold bond after it matures?
Individuals, HUFs, trusts, universities, and charity institutions are all eligible investors. Individual investors who change their residency status from resident to non-resident may keep their SGB until they are redeemed or matured early.
After 5 years, how do I sell my gold bond?
- Indexation Benefit: If an investor transfers bonds before maturity, the investor will receive indexation advantages and the interest earned and redemption money will be guaranteed by the government.
- Benefits of Trading: An investor can trade gold bonds on numerous stock exchanges within a specific time frame. After 5 years, gold bonds can be traded on the National Stock Exchange and the Bombay Stock Exchange.
- Sovereign Gold Bonds can be used as collateral or security against a variety of secured loans, according to some banks.
Which gold bond is the best?
Sovereign Gold Bonds are the safest way to buy digital gold because they are issued on behalf of the Indian government by the Reserve Bank of India and pay an annual interest rate of 2.50 percent. The bonds are measured in grams of gold, with 1 gram as the base unit. The greatest amount of money that can be invested is 4 kg. These bonds have an eight-year tenor and an exit option starting in the fifth year. It’s another hassle-free way to invest in gold because you have ownership of the metal without having to own it physically.