Gold is a popular investment instrument among Indian investors of all ages. While gold investments bring a multitude of benefits, financial experts often suggest the inclusion of 8% to 10% investment in precious metals, including gold, in one’s portfolio for diversification and risk mitigation. With the significance of gold investment established, the demand and availability of alternative investments in gold come to light. The purchase and possession of physical gold comes with a huge amount of safeguarding and, thankfully, can be avoided with the sovereign gold bond investment scheme.
In November 2015, the Government of India launched the Sovereign Gold Bond (SGB) Scheme under the Gold Monetization Scheme. The RBI is responsible for issuing the bonds in various series at selective times with specified subscription periods.
With the third tranche of the current fiscal year (2023-24) valued at INR 7505 crore, the anticipated Series IV tranche of sovereign gold bonds was opened in February this year. While new bonds enter the market, some bonds, like 2016-I and II, are ready for mature withdrawal. The many benefits offered by such bonds have played a significant role in its noteworthy subscriptions. Join us as we explore the reasons investors should add sovereign gold bonds to their investment portfolios!
Key Takeaways
- SGBs are backed by India’s Government Security Act and therefore have minimal risk.
- Allowed for premature withdrawal after 5th year and can be traded on stock exchanges.
- The interest rate received is 2.5% per annum given semi-annually
- Avoids the concerns of security and the need to store it
- Solid returns with long-term gold’s value appreciation
- Provides a hedge against inflation as it’s linked to the price of gold
- When held till maturity, exempts the capital gains from attracting tax
- Use SGBs as collateral for loans giving investors an additional financial incentive
- Ideal for those who seek low-risk and stable investment returns.
Reasons to Invest in Sovereign Gold Bonds
The idea behind a sovereign gold bond investment is to offer the benefits of investing in gold without having to hold it in physical form. The following perks make these investment instruments worthwhile for different sorts of investors.
1. Low Risk
India’s Government Security Act of 2006 safeguards every offering under the sovereign gold bond. The sovereign backing at such a level minimises the risk of defaulting to nil. Hence, these are easily considered among the safest investments available in the country.
Market fluctuations can present some risks as they can influence gold prices. That said, the stability generally observed in gold prices reduces the uncertainties to a great extent.
2. Fixed-Tenure & Liquidity (premature, resale, transfer)
Each SGB has a maturity period of 8 years. However, the bonds are open for premature withdrawal after they enter their 5th year. These bonds can be withdrawn on the date of interest payout in the 5th, 6th, and 7th years.
If the investors require an emergency fund or any other fund, they can sell bonds that are in dematerialized forms on the stock exchange. Those with the physical holding certificates must dematerialize bonds first, and then, they can proceed to trade on the stock exchange.
In accordance with 2006’s Government Securities Act and 2007’s Government Securities Regulations, bonds are also transferable before maturity. With all these features, holders of sovereign gold will enjoy great liquidity.
3. Periodic Payouts
While investors wait for maturity, the gold bond schemes allow them to enjoy the interest on their investments. The gold schemes offer two interest payouts every year at a rate of 2.5%. While it doesn’t show a source of monthly income, it still contributes to a periodic fund generation that can be useful in different ways.
4. Security Convenience
Buying gold means making an actual purchase, bringing it back home, and storing it safely. The entire process requires effort and secure execution. The sovereign gold bond scheme aims to eliminate the hassle associated with gold investment and make it way more convenient.
Instead of physical gold, investors receive a certificate as proof of the investment, which is much easier to safeguard. Investors can digitalize their bond certificates and hold them in their demat accounts, further increasing security.
5. Capital Appreciation
The price of gold tends to go up in the long term, thus ensuring the potential for solid returns on sovereign gold bonds. Gold can potentially avoid market turmoil and hold its value, further assuring investors. There are also low chances of the value of gold being influenced by unsystematic risks.
Another simpler explanation can be found in gold’s cultural and emotional significance. Regardless of the price and economic scenarios, the demand for gold will prevail as people in India continue to consider the purchase and gift this material on special events and occasions.
6. Hedge Against Inflation
History shows that gold has been a hedge against inflation. The growth of such assets is significantly higher than a country’s inflation rate. An investment in sovereign gold bonds can help investors enjoy capital growth and wealth accumulation over a long period.
7. Long-Term Investment Goals
The 8-year tenure makes an SGB one of the most secured long-term investments. The amount stays invested and keeps generating interest without risk of default or influence from the market. Moreover, there is not much monitoring required once the bond is purchased and the certificate is received. Investors can add these bonds to their portfolios and plan their long-term goals accordingly.
8. Overdraft Facility
Investment doesn’t provide emergency funds only via premature withdrawal. Instead, they turn into assets and can become collateral when required. Sovereign gold bonds can also be used for loan purposes. Getting approval for loans will be easier and quicker due to the highly secure nature of the asset. One can get approval at a profitable interest rate. The RBI’s Loan-to-Value (LTV) regulations permit overdrafts of up to 75% of the bond’s value.
9. Tax Benefits
Much like any bond investment in India, sovereign gold bonds are taxable in two ways: capital gains and interest accumulation. While the accrued interest falls under ‘Income from Other Sources ’ and is taxed as per individual tax slab rates, the long-term capital gains become tax-exempt if the bond is held until maturity.
Who Should Invest in Sovereign Gold Bonds: Ideal Investor Persona
Is a sovereign gold bond a good investment? Considering the list of benefits, the answer is yes. However, the following three factors should be considered when drafting the ideal buyer persona for any investment in sovereign gold bonds.
- Risk Appetite: The risk level associated with sovereign gold bonds is low to none. Thus, these are ideal for those with low-risk appetites. These bonds also benefit investors looking to balance their investment portfolio with multiple high-risk investments.
- Investment Goals: There is liquidity, but it comes after 5 years. Sovereign gold bonds will be more beneficial for those with long-term investment goals.
- Interest: The 2.5% per annum interest rate may have greater alternatives, but when the low risk and high stability are taken into consideration, they receive better scores. Those looking for steady and assured returns should go for sovereign gold bonds.
Investment in Sovereign Gold Bonds vs Physical Gold
Here is a quick look at the perks of acquiring a sovereign gold bond instead of physical gold.
| Parameters | Sovereign Gold Bond | Physical Gold | Gold ETF |
|---|---|---|---|
| Returns | Higher than the actual return on gold | Lower compared to the real return on gold because of the making charges | Lower than the actual return on gold |
| Safety | High | Low due to risk of theft and wear and tear | High |
| 0% Capital Gain Tax | Yes | No | No |
| Purity | High since the gold is in electronic form | The purity of gold provided by the seller remains questionable | High since the gold is in electronic form |
| Loan collateral | Accepted | Accepted | Not accepted |
| Tradability | Tradeable and redeemable from the 5th year with the government | Restrictive | Tradable on the Stock Exchange |
| Storage expenses | Not Applicable | High | Not Applicable |
Learn & Enjoy Seamless Sovereign Gold Bond Investment with GoldenPi
GoldenPi presents an investor-friendly, comprehensive platform for all seasoned and newbie investors. You will find the latest information and updates on sovereign gold bonds here. Besides checking out the issuing dates, prices, and subscription details, you can also learn all about the benefits, tips, and expert suggestions for sovereign gold bond investments.
How to invest in sovereign gold bonds?
When you are all informed and prepared to invest in a sovereign gold bond, you can do so in three easy steps on GoldenPi.
- Complete the KYC.
- Enter the desired purchase quantity (in grams ).
- Make the payment.
Stay updated and effortlessly invest in sovereign gold bonds with GoldenPi!
FAQs About Sovereign Gold Bonds
1. Why should investors consider sovereign gold bonds?
An investor can consider SGBs for various reasons such as being secured with government backing, receiving periodic interest rates paid twice a year, having significant benefits of tax, having convenience over holding physical gold, providing liquidity, and having a potential for greater capital appreciation. Thus making them attractive and secure investment options for achieving the long-term goals of an investor.
2. Who is eligible to invest in SGBs?
Indian citizens, including individual investors, trusts, HUFs (Hindu Undivided Families), charitable institutions, and corporations, are eligible for SGBs.
3. What is the minimum investment amount for sovereign gold bonds?
A minimum amount equivalent to the price of 1 gram of gold must be invested.
4. What is the maximum investment amount for SGBs?
Individual investors and HUFs can invest a maximum amount equivalent to 4 kg of gold. The maximum cap for corporations and trusts is an amount equivalent to 20 kg of gold.
5. When can investors make the request for the premature withdrawal?
Investors can opt for premature withdrawal once the bond enters its 5th year. The request can be made within 30 days before the interest payment date.
6. When and where is the redemption price mentioned?
India Bullion and Jewellers Association Ltd. (IBJA) announces the price of gold. The redemption price is calculated as per the price of gold in the previous 3 working days.
7. Is there any discount on sovereign gold bonds?
Investors can enjoy a discount of INR 50 per gram of gold on digital bond purchases.
8. Can an SGB be dematerialized after purchase?
Yes, an SGB can be dematerialised only if it is in physical form. Investors can request the transfer from a physical form to a demat after they have completed the purchase.
