How Do Sovereign Gold Bonds Compare to Other Gold Investment Options?
In India, gold has always been one of the most trusted and reliable investment options, and investors love to invest their money in gold. But to limit the import of gold, the Government of India launched the scheme of Sovereign Gold Bond (SGB) in 2015. Every year the Government launches different tranches of SGB at regular intervals. Comparing SGB with physical gold it has some pros. However, there are some cons as well. So let’s dive in and understand more about SGBs.
Features of Sovereign Gold Bonds
- Price: When determining the cost of a sovereign gold bond, the Indian Bullion and Jewellers Association Limited (IBJA) fixes the average closing price of 999 per cent gold over the previous three days.
- Interest Payment: A SGB provides its investors 2.5% simple interest per annum, distributed every six months.
- Tenure: SGBs have a term of 8 years.
- Quantity of Subscription: Subscriptions in SGBs are made based on grams of gold. The minimum investment is 1 gram of gold, and the maximum limit is 4 kg of gold for individual investors and undivided Hindu Families (HUF). The limit is 20 kg for trusts and corporations.
- Resale of SGBs: One can sell Sovereign Gold Bonds in the secondary market after 14 days from the subscription date. The resale price depends on the gold prices and their demand and supply in the stock market.
- Premature Withdrawal: Investors are allowed to withdraw their investment after a holding period of 5 years which is mandatory.
The Benefits of Investing in Sovereign Gold Bonds
- Interest Payment: One of the biggest reasons people invest in SGBs is regular interest payment. The Government of India provides a fixed annual interest on your invested amount. The interest is generally around 2.5% which is disbursed every six months.
- Available in Paper and digital format: SGBs eliminate the concern of holding physical gold. These bonds are readily available in paper format or stored in your Demat account. In addition, investors get a holding certificate when they invest in SGBs.
- Tax Advantages: Sovereign Gold Bonds have tax advantages too. The interest you receive is free of Tax Deducted at Source (TDS), and also you are allowed to transfer the bond before it matures and get the indexation benefit.
- Less Risky: The RBI issues an SGB under the Government Securities Act of 2006 on behalf of the Central Government. Therefore it is known as one of the safest investment forms. Any risk included with SGB can be volatility in gold prices.
- Capital Appreciation: The underlying asset in SGB is gold, a precious metal, and its price tends to increase in the long run. When the stock market is volatile, people prefer investing in gold as it is considered stable. Moreover, gold is always in high demand, which leads to an appreciation of the amount invested.
- Long-Term Investment: Sovereign Gold Bond has a holding period of eight years and is suitable for investors aiming to invest for the long term.
- Act as collateral: Banks and non-banking finance companies (NBFC) accept SGBs as a security for loans. An individual can get a loan of up to 75% of the bond’s market value.
Risks of Investing in Sovereign Gold Bonds
- Long Maturity Time: SGBs have a maturity period of eight years, which may be why some investors avoid investing in the scheme.
- Available in Tranches: Other investment options allow you to invest any time of the year. But SGBs are available in tranches, and you can only invest in a specified period per the RBI’s calendar.
- Capital Loss: The price of gold in the international market affects the bond’s value; your investment may have a capital loss if the price of gold comes down in the global market. But it happens on rare occasions since gold is a valuable commodity and is always high in demand.
- Fixed Interest Rate: SGBs offer a fixed simple interest rate on the invested amount of around 2.5%, while you can get better returns in equity mutual funds and stocks.
Should you invest in Sovereign Gold Bonds?
SGBs can be an excellent investment for people who want to buy gold but want to avoid holding it physically. In addition, it is a good option for conservative investors as it provides regular returns with a sovereign guarantee. If you are looking to diversify your portfolio, this is an excellent option to invest. If you are someone who does not mind waiting for eight years, you are good to go.
But if you want to buy gold for a specific reason, such as your child’s marriage or gifting, you should go for physical gold. Remember that selling your SGBs in less than eight years will attract taxes.
You can benefit from the discounted price if you can hold the SGBs until it matures. However, the trade volume of these instruments is deficient, somewhere around 100-150 units every day. Because of the illiquidity, you cannot trade most of the bonds at all. If you want to buy these in bulk, you may consider buying them from the secondary market because buying them in bulk may lead to sudden hikes in prices.
Sovereign Gold Bonds can be the best alternative for physical gold, providing tax benefits on its maturity. Still, they have yet to be introduced for trading purposes, so you should buy these only if you are a long-term investor and have no intention of selling them until they mature.
Which is better gold sovereign bond or gold ETF?
SGBs are a more tax-efficient investment than gold ETFs, but gold ETFs offer more flexibility and potential for higher returns.
What is the alternative to sovereign gold bonds?
Some alternative to sovereign gold bonds can be physical gold, digital gold, and gold ETFs.
Can I sell sovereign gold bond anytime?
You can buy sovereign gold bond anytime from the secondary market . If you want to buy from the primary market, you have to buy when the tranches are released by the RBI.
What is the good amount to invest in SGB?
The amount you invest in SGB will depend on investment goals and risk appetite. However, the minimum invest amount is 1 unit/1 gram and maximum is 4 kgs for an individual .