Maximizing savings after receiving your salary can be challenging amid bill payments. The solution? Investments! Rather than letting your money sit idle, investing offers a prime opportunity to both save and increase your wealth. However, investments come with risks. It’s crucial to thoroughly acknowledge the potential risks and benefits of any investment before committing your hard-earned money.
The respect that Indians feel for gold goes beyond its prevailing market value. Due to its popularity and great demand, gold tends to appreciate over time, making it an extremely promising investment option. There are now ways to hold gold without incurring the risks associated with its production and waste. In the vast landscape of gold investments with risks, the secured ones are sovereign gold bonds offered by the Government of India and the Reserve Bank of India (RBI).
Understanding Sovereign Gold Bond
Sovereign gold bonds are RBI-mandated certificates issued in exchange for grams of gold, letting people invest in gold with no worries about keeping their physical assets secure. Because gold prices are less vulnerable to market swings, they serve as a safe investment option for individuals looking to invest. Also, they are backed by the government, so investors consider them safe.
In order to provide investors with an alternative to gold in its natural state, the Indian government announced the Sovereign Gold Bond (SGB) Scheme in November 2015. So, what are sovereign gold bonds? They are government-backed securities that offer a way to invest in gold without the need for physical possession, while providing both capital appreciation and periodic interest. SGBs monitor the asset’s export-import value while simultaneously ensuring transparency.
Since the RBI is issuing these bonds under Government of India stocks, there is a predetermined subscription window within which investors can purchase sovereign gold bond schemes in portions. Every two to three months, the RBI usually issues a press release announcing the public offering of the latest sovereign bonds. There is a one-week window within which people can sign up for this scheme.
When an investor successfully purchases a sovereign gold bond, a holding certificate is granted in their name. Their worth is expressed in multiples of the rate of gold per gram.
How is the price of the SGB issued determined?
The issue price is linked to the average 24-carat gold price, which is the gold of 999 purity. This is to ensure that it exhibits market value accurately. The RBI, with the consent of the Government of India, determines the issue price for each tranche of the SGB, which is the simple average of the 999 purity gold’s closing price for the last 3 working days of the week preceding the subscription period. This price is published by the IBJA (Indian Bullion and Jewellers Association, Ltd.)
For instance, if the issue is from April 10th to April 14th, the closing prices of the last 3 business days preceding the subscription period, which are April 6, 7, and 8, of the 24 carat gold are considered for the calculation of the simple average.
Assuming it was 5000, 5050, and 5100, then the simple average is (5000 + 5050 + 5100) /3 = 5050.Therefore, the issue price is 5050 Rs per gram.
To promote digital transactions, the GOI offers the investor a discount of 50 rupees per gram if the payment is made through online modes. Meaning for 1 gram of investment in SGB of value 5050 Rs, you’ll only pay 5000 Rs after discount of 50 Rs. Similarly for 2 grams of investment, a 50 + 50 = 100 Rs discount is levied; therefore, the investment is only 10,000 Rs instead of 10100 Rs.
Individuals Who Can Invest in a Sovereign Gold Bond
The 2020 Sovereign Gold Bond Scheme has 8-year holding period. Since this scheme offers one of the best returns on investments of any government-mandated scheme, individuals who have a low appetite for risk but who still wish to enjoy considerable returns on their investment corpus may choose to invest their savings in it.
Any resident of India is eligible to invest in SGB, including individuals, trusts, HUFs, universities, and charitable organizations. You may also invest in the name of a minor.
Who is not eligible to invest in SGB?
NRIs are not eligible to invest in SGB, however, if the resident becomes an NRI after investing in SGB, they can continue to hold the bond until maturity.
Benefits of Sovereign Gold Bond
Here are some benefits of the sovereign gold bond scheme that illustrate why you should invest in sovereign gold bonds.
Interest Payables
One of the primary benefits of the sovereign gold bond scheme is the interest payments. A fixed yearly interest rate is provided by the government on your SGB investment. The investor receives this interest payment in two instalments, which are made every six months. Regardless of whether the gold price increases or falls, investors are certain to get payments.
Minimal Risk
In compliance with the Government Security Act of 2006, the Reserve Bank of India issues sovereign gold bonds in the name of the national government. With such strong government support, sovereign gold bonds rank among the safest investment options in India because there is very little risk of payback failure.
Gold prices move around primarily because of market trends, which might be the cause of any risks that are related to these investments.
Loan Collateral
Sovereign gold bonds can be an approved form of collateral for taking out loans. According to the RBI’s LTV standards, any registered financial institution may lend up to 75% of the current market value of these bonds.
Safe from Inflation
The price of gold shows significant capital growth. These assets have growth rates that are significantly higher than the national inflation rate, making them excellent options for investments. Therefore, investors could notice increases in the actual worth of their investment holdings, allowing them to build up substantial assets as time passes.
Tradability
In stock exchanges like NSE and BSE, SGBs are listed; therefore, they can be easily traded in the secondary market, making them tradable like stocks. When you can trade, it means the liquidity is high and investors also get an opportunity to sell before maturity, making it easy to access funds.
This gives an edge to not being committed to long-term investments, which aren’t easily liquidated like other investments, and also avoids holding any sort of physical gold. The prices seen on the exchange are a reflection of the gold price and the market conditions, therefore allowing them enough visibility to capitalize on the price movements.
Transferability
SGBs can be transferred to any investor by either selling or gifting, with a straightforward process. It can be gifted to family members or friends without any complexity involved in transferability. You can also add the nominee as a bondholder, making it transferable in the event of demise, where the nominee can claim the bonds smoothly, thereby taking ownership.
Ease of Use
The principal objective of sovereign gold bonds has been to minimize the challenges associated with holdings in gold, given that gold in the form of any physical asset requires appropriate and safe storage. Investors who purchase a gold bond receive the ownership certificate as an acknowledgement of their investment, which serves as a confirmation of the same. To further enhance the security of their financial investment, investors could choose to digitally store these holding certificates and use them in their Demat accounts.
Tax Benefits
One of the reasons to invest in sovereign gold bonds is because of the tax benefits they offer. TDS is not levied on the interest earned from your SGB investments. Additionally, you are able to transfer the bond ahead of its maturity and earn from indexation. The bond is even exempt from capital gains tax if you redeem it when it matures. But the interest is completely taxable in accordance with your income tax bracket.
Disadvantages of SGB
- Premature withdrawal is available only after 5 years and comes with a long tenure of 8 years.
- The price is linked to the price of gold and gold is volatile.
- The interest earned is taxable as per the individual slab rate.
- Depending on the demand in the secondary market, the liquidity is there but not enough as physical gold.
- To trade on the stock exchange, the investor must have a Demat account
How to Sell SGB?
SGBs are listed in the NSE and BSE stock exchanges and can be traded in the secondary market before maturity. In order to sell, the SGB must be in demat form, but in the case of paper form, it must be converted to demat form.
In a trading platform with your brokerage account, you should be able to sell the SGB. Depending on the dynamics of demand and supply and the price of the gold in the market, it can be sold.
The price of the gold in the market may differ from the issue price due to the market fluctuations and there is a brokerage charge applied when you sell.
If you want to redeem through RBI, it is possible only after 5 years of holding the SGB which is allowed during the interest payout dates. The dates of premature redemption are announced by the RBI and the investors who want to sell the SGB must intimae the redemption intent to the respective broker.
The price of redemption is equal to the average of the last 3 business day’s closing price of the 999 purity gold which is published by the India Bullion and Jewellers Association Ltd.
How to Invest in Sovereign Gold Bonds Online?
If you are looking to apply for a sovereign gold bond online, it is an easy process. Following are the steps to apply for a sovereign gold bond.
- Log in to your account on GoldenPi. If you do not have one, sign up and create an account.
- Go to the sovereign gold bonds section.
- Choose the desired bond scheme available.
- Fill in the details required.
- Select the amount of gold (in grams) you want to invest in.
- Complete the payment and make your investment.
Invest in Sovereign Gold Bonds Online with GoldenPi
Sovereign Gold Bond investments offer investors a great chance to invest in gold in addition to a number of additional perks. Compared to physical gold, it does not need any security measures. Furthermore, they provide transparent pricing depending on the current market value of gold at the time of investment, including a small premium.
For investors looking to add gold holdings to diversify their portfolio, modern investment options such as gold sovereign bonds are appealing. These bonds are a desirable choice for one’s investing portfolio since they offer security, ease, and adaptability.
GoldenPi offers you an easy platform to invest in sovereign gold bonds as well as other investment options. With GoldenPi, investments have become as easy as buying products online with proper details, terms, and conditions. We offer you the best investment options across the market so that you can make informed investing decisions.
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FAQs About Sovereign Gold Bond
1. What are the benefits of investing in sovereign gold bonds?
SGBs have various benefits that include minimal risk with government backing, guaranteed interest payouts per annum and paid twice a year, can be utilized as collateral for loans, an edge against inflation, ease of transferring and holding digitally and comparatively great tax advantages.
2. Is sovereign gold bond a good investment?
If you’re seeking long-term gold investments, sovereign gold bonds are a great investment choice over real gold and gold exchange-traded funds (ETFs). Sovereign gold bonds investment provides a secure and convenient way to invest in gold while also offering the benefit of earning interest over the bond’s tenure. They provide higher yields, no storage requirements, liquidity, tax advantages, and purity certification. It is a simple and effective method of making gold investments.
3. Can I sell a sovereign gold bond anytime?
Sovereign gold bonds are issued with an eight-year maturity. After five years, investors are eligible for an early release or redemption. As an alternative, if the bonds are listed as of the RBI-specified date, they can be sold in the secondary market.
4. What is the difference between a gold fund and SGB?
Individuals can only deposit a maximum of 4 kg in SGBs, as compared with Gold ETFs, which have no investment limitations. Since gold ETFs do not have a lock-in period and can be traded on the open market at the choice of investors, they are more liquid than SGBs.
5. Can we convert SGB to physical gold?
No, sovereign gold bonds cannot be exchanged for real gold. SGB’s primary goal is to make long-term investments. SGBs, on the other hand, are listed on the market and can be exchanged if they are available in demat format; nevertheless, SGBs cannot be converted into physical gold. SGB is only ever offered on paper or in digital format.
6. Is it better to buy physical gold or SGB?
SGBs are digital forms of gold that are traded using demat accounts; therefore, compared to physical gold, they are immune to potential risks of theft or robbery. SGBs offer a 2.5% annual return rate, which gives them an advantage over physical gold investments. SGBs require a minimum investment of one gram.
7. Which bank is the best choice for sovereign gold bond investments?
Gold bonds are offered through the regional branches or offices of nationalized banks, specified post offices, allocated foreign banks, and chosen private banks. You can invest in SGBs through any bank. It is suggested that you form a sovereign gold bond in the bank where you have a bank account.
