Sovereign Gold Bonds

Is Sovereign Gold Bonds a good investment option?

Diversification is one of the essential facets of financial planning. Diversification helps investors to minimise their portfolio losses. It is because different investment options react differently to the same situation. E.g., price of gold rises when the equity market declines because of uncertainty, global trade wars, a pandemic, etc.  

Gold is viewed as a safe haven asset. Hence, you can add gold in your portfolio to protect your portfolio from high volatility. 

However, acquiring physical gold or gold jewellery may not be the effective way to take exposure in gold.

Sovereign gold bond is one such investment choice that will allow you take advantage of the change in gold prices and reduce your portfolio risk.

What is Sovereign Gold Bonds(SGB)?

The Reserve Bank of India issues sovereign gold bonds on behalf of the government. Sovereign gold bonds are open for subscription every two or three months for a week. RBI publishes the dates when investors can apply for SGB.

Each bond represents one gram of gold of 999 purity, and it reflects the price of one gram of gold.

How is sovereign gold bond better than physical gold?

Unlike physical gold, there is no risk of theft of sovereign gold bonds. This means that you can sleep peacefully without fretting about losing your gold.

There is no storage cost of gold bonds. While it may require lockers to store physical gold, there is no special requirement for a locker with sovereign bonds.

Sovereign gold bonds track the price of 999 purity gold. Hence, you don’t have to think twice about purity or the price that you will receive.

While selling your physical gold, the buyer may pay you less than your buying cost. It is because physical gold jewellery comes with a huge making charge that is not taken into account when you sell your gold.

What are the different features and benefits of SGB?

Safe investment option:

The government backs sovereign gold bond, which makes it a safe investment option.

Investment Tenure:

Sovereign gold bonds have a maturity period of 8 years. However, investors can exit after five years.

Returns and Interest:

The bonds are issued and redeemed at the prevailing price of gold. Hence, the returns will depend on gold prices. Besides the gold returns, investors will also receive a fixed interest rate of 2.5% per annum paid on a half yearly basis. 

Minimum and maximum amount of investment:

Investors need to buy at least one unit of the bond. Individuals can invest a maximum of 4 kgs of gold i.e. 4000 units in a year.  

Tax on capital gains:

Sovereign gold bond is tax free at maturity. You will be eligible for long-term capital gain taxation with indexation benefits, similar to debt funds, if you sell it after three years.

Offline and online application:

There are multiple ways to invest in gold bonds. If you are not comfortable investing online, you can walk into your nearest bank branch and post office. However, people who invest online get Rs.50 discount on every unit of sovereign gold bond invested.

Demat account is not necessary:

If you don’t have a demat account, you need not worry. You can invest in gold bonds without a demat account. Depending on the mode of investment, you will receive e-certificate or paper certificate.  Investors with demat account can transfer their units to other investors before maturity.

Loan Collaterals:

You can use your sovereign gold bonds as collateral to take gold loans. The loan application process will be similar to a regular gold loan application.

No management fees:

Gold bonds don’t have any recurring management fees or expenses. This makes SGBs highly cost effective.

Limitations of the sovereign gold bond:

  • The gold bonds have a fixed tenor of eight years. After maturity, the gold bonds are redeemed and you will receive the value of the bonds as per the prevailing gold rate. You don’t have the option to remain invested.
  • As it is open for subscription for a week every two to three months, you can only invest during the particular period.
  • Transferring your units to other investors will depend on the liquidity. Low liquidity in the secondary market may make it difficult to exit.

Conclusion:

Gold in your investment portfolio can help to diversify your portfolio and reduce risks. Sovereign gold bond is one of the best ways to invest in gold. You can talk to your financial advisor to know more.   

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