We Indians have a long history of gold investing. For adequate portfolio diversification, financial advisers also recommend putting a portion of your investible capital in gold. Due of their appealing features, Indians have been investing in Sovereign Gold Bonds (SGB) rather than real gold in recent years.
Let’s go through the essential characteristics of SGBs and why you should buy them.
Is it wise to invest in 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.
What is the purpose of gold bonds?
Sovereign gold bonds, or SBGs, are gold bonds issued on behalf of the Indian government by the Reserve Bank of India (RBI). The gold in this bond is sold on a unit-by-unit basis, with each unit’s value deriving from underlying one gram of 999 quality gold. The price is established by averaging the closing gold prices for the three working days before to the subscription period. The India Bullion and Jewellers Association Limited publishes these closing prices (IBJAL). The redemption price is based on the same source’s most recent base data.
SGBs are simple to buy and manage, with a period of eight years and an annual interest rate of 2.5 percent paid half-yearly. Individual purchases are limited to 4 kilograms every financial year, and trust purchases are limited to 20 kilograms. A PAN card is the only document required for the purchase of SGBs; without it, no investment in these bonds is possible.
Why are gold bonds a terrible investment?
Physical gold has its own set of advantages and can be a good long-term investment. Physical gold, on the other hand, is a tangible asset that can be touched and felt. As a result, it entails some risk, such as storage issues, charging issues, theft, and so on. Mutual funds, on the other hand, do not promise fixed returns; as a result, an investor should always be prepared for the possibility of their money depreciating in value. As a result, mutual funds are subject to price volatility.
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 Bond a better investment than FD?
SGB and FD investments are both low-risk, but they operate differently. Fixed deposits offer a lower rate of return than gold bonds, but the benefit is that your money will be safe from market swings. Sovereign gold bonds provide better returns, but they are also susceptible to market volatility. You must decide what to invest in based on the level of risk you are willing to accept. It’s a good idea to make sure your investment fulfills your financial objectives.
After eight years of Sovereign Gold Bonds, what happens?
New Delhi: 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.
What is the 2021 Gold Bond Scheme?
Series VIII’s issue price was Rs 4,791 per gram, and it was available for subscription from November 29 to December 3 last year.
The bond’s price is determined in Indian rupees using a simple average of the closing price of 999-purity gold published by the India Bullion and Jewellers Association (IBJA) for the last three working days of the week prior to the subscription period.
The bonds are denominated in gram(s) of gold multiples, with one gram as the fundamental unit. The bond will have an eight-year tenor, with an exit option after the fifth year that can be utilized on the next interest payment dates.
The minimal investment is one gram of gold, with a maximum subscription limit of four kilograms for individuals, four kilograms for HUFs, and twenty kilograms for trusts and similar companies per financial year (April-March).
The sovereign gold bond plan was introduced in November 2015 with the goal of reducing physical gold demand and shifting a portion of domestic savings formerly used to buy gold to financial savings.
Nish Bhatt, Founder and CEO of Millwood Kane International, commented on the sovereign gold bond plan, saying, “SGB is a cost-effective approach for investors to gain exposure to gold. There are no storage fees or taxes, like there are when purchasing actual gold. Paper gold has a higher redemption value and is more easily redeemed for loans. The SGB comes with a 2.5 percent coupon and a tax benefit for investors.”
He went on to say that the scheme has been a major success for the government, with over Rs 32,000 crores raised since its launch in 2015.
“Gold prices are currently trading near a two-month low. Gold prices are around Rs 9000/10 gm lower than they were in 2020. “The decline is primarily attributable to the US Federal Reserve’s minutes, which showed a faster rate hike and a drop in bond buying than previously projected,” Bhatt said in a statement.
The rate at which global central banks unwind their monetary positions, as well as the movement of the US dollar, will dictate gold prices in 2022, he said.
What are the advantages of the gold bond scheme?
If you invest in gold coins and bars, you’re squandering a golden opportunity to make a lot of money. There are gold bonds on the market that allow you to profit from price fluctuations while still paying a fixed interest rate, similar to bank fixed deposits. A sovereign gold bond is a low-cost, high-quality alternative to purchasing actual gold. Let us explain why gold bonds are a good investment.
The value of a sovereign gold bond is measured in kilos of gold. You can buy in 1 gram increments (gm). As a result, a 1 gram investment is required. The maximum amount of gold that can be purchased through gold bonds is 4 kg per investor every fiscal year. It is possible to nominate someone. Remember to amend the nominee information throughout the investing process, or you can do it later.
You might be shocked to learn that a set interest rate is one of the key advantages of the sovereign gold bond plan. Every year, the interest rate on gold bonds is 2.50 percent. Remember, this is in addition to the gold price increase. On the nominal value, interest is paid every six months or semi-annually.
Gold bonds have an average term of 8 years. After 5 years, the option to exit is available. If you wish to get out before the end of the term, you’ll have to do an early redemption. The bank must be notified. IDFC FIRST Bank, for example, has a 30-day notification requirement.
Additionally, gold bond holders can sell their bonds on stock exchanges at any moment. Please keep in mind that if the bonds are sold via the exchange platform, the applicable capital gains tax will be paid at the same rate as if the bonds were sold in person.
When you apply for a sovereign gold bond, you will be given an application number right away. In addition, all gold bond investors receive certificates from the RBI. The bank is responsible for delivering the certificate. Keep in mind that certifications typically take 15 to 30 days to be issued once an application is submitted.
For a variety of reasons, a sovereign gold bond is a superior investment than real gold.
For starters, when you apply for gold bonds online, you can get a lesser price than if you bought physical gold.
Fourth, because these bonds are issued by the government, they are backed by the government.
Fifth, individual investors benefit from the sovereign gold bond scheme since there is no capital gains tax at maturity or redemption. For non-individual investors, there is also an indexation benefit if the money is transferred before maturity. Keep in mind that the interest you earn is taxable. There is no TDS during redemption or interest distribution, which is a welcome relief.
Last but not least, a sovereign gold bond is extremely liquid. This is due to the fact that the investment can be used as a form of collateral for loans.
Gold bonds are available for purchase by all residents, HUFs, registered entities such as trusts, universities, charity institutions, societies and clubs, partnership firms, and private or public limited enterprises.
Non-Resident Indians (NRIs) and foreign institutions/entities, on the other hand, will not be permitted to own gold bonds.
Gold bonds should be purchased by all gold investors. This is a fantastic credit-risk-free investment option. There are no set-up costs or annual fees to pay. It’s also taxed like actual gold and comes with indexation benefits.
Which is a better investment: gold or mutual funds?
India’s passion for gold is obvious in the fact that it is the world’s largest consumer of the yellow metal. It has been fought for by Greeks, Romans, Ottomans, Aryans, Egyptians, and Mayans in the past. We buy gold on many momentous occasions as part of our culture and traditions. Gold investment has rescued households in times of need time and time again as a custodian of value.
When looking at this asset from the standpoint of an investment plan in today’s environment, the key goal is to diversify your portfolio and thus reduce total portfolio risk. It’s also a fantastic way to protect yourself from inflation and other threats. A well-balanced asset allocation in your portfolio will result in the most effective goal-based planning. A portfolio is made up of assets such as insurance, mutual funds (equity or debt), gold, real estate, liquid funds, and so on. As a result, the question becomes whether you should invest in gold or mutual funds. Let’s look at the advantages and disadvantages of these two assets.
While both assets are suggested to be included in one’s portfolio since they give complimentary benefits, understanding them will allow you to determine the amount of your investment in both assets that is appropriate for your needs.
In nature, there is just a little amount of non-reactive metal. It is mined and cleaned for commercial purposes and for use in jewelry making.
An investment instrument that provides diversity by exposing investors to a basket of equities or debt assets.
Gold is accessible in both physical and digital versions. The purity of gold varies, with 12k, 18k, and 24k being the most common.
Mutual funds come in a variety of shapes and sizes, but they all promise market-linked returns. Some are more dangerous than others.
You can buy gold as a physical commodity, a gold mutual fund, a gold exchange-traded fund, or a sovereign gold bond.
By completing e-KYC, you can invest in mutual funds. It is possible to purchase it without having a Demat account.
The government pays you interest if you invest in sovereign gold bonds. There is no further benefit for any other sorts of gold investments.
Fees are rarely charged when investing in gold. The fee ratio of a gold ETF or mutual fund is also acceptable. Gold in the form of jewelry/ornament, on the other hand, has making charges.
Investors do not required to keep a continual eye on their gold holdings. Typically, these are long-term investments.
Because mutual funds are market-linked, it’s critical to keep an eye on the markets in order to profit from market cycles.
The risk tolerance of the investor determines whether to invest in gold or mutual funds. It is generally true that gold does not provide returns comparable to those seen in the stock market. As a result, because mutual funds are market-linked, they provide greater long-term returns to investors. However, because gold does not depreciate in value over time, you can invest a tiny amount of your wealth in gold. This little amount can act as a decent hedge and support the total portfolio in times of crisis.
Tata AIA Life Insurance combines the best of both worlds by providing a savings plan with high market-linked returns. The Smart Sampoorna Raksha (UIN- 110L156V02) life insurance plan is one of India’s greatest investment plans, providing an appealing option for investors wishing to diversify their portfolio with a market-linked insurance policy. The following are some of the plan’s features: