The Role of Sovereign Gold Bonds in Portfolio Diversification

7 min read • Updated 31 July 2023
Written by Vaibhav Khandelwal

A well-diversified portfolio includes assets that suit your investment goals and are designed to provide you with returns in every market condition. Investing in various asset classes, including stocks, bonds, gold, real estate, etc., is suggested. 

Gold acts as a hedge against inflation and helps diversify the portfolio. Also, it is safe during economic slowdowns because it is inversely related to the stock market. Hence, diversifying your portfolio to gold by around 10-15% is recommended.

Gold as an asset class

Unlike other assets such as equity, bonds, etc., gold is a real asset with no counterparty or credit risk. In the long run, investing in gold is a good option with an investment horizon of 5-7 years. Gold is always in demand, and history is the best evidence for its encouraging uptrend. If you want to invest in gold for the long term, Sovereign Gold Bonds (SGBs) are a good option.

What are Sovereign Gold Bonds (SGBs)?

SGBs are simply government securities denominated in grams of gold. They act as a replacement for real gold. Investors must pay the issue price in cash, and the bonds must be redeemed in cash when they reach maturity. On behalf of the Indian government, the Reserve Bank of India (RBI) issues the bonds. One gram of gold is used as the unit of measure for a sovereign gold bond. Therefore, an SGB’s minimum investment is one gram. These bonds are accessible both physically and digitally. Banks, stock-holding corporations, post offices, and recognised stock exchanges sell them.

How do Sovereign Gold Bonds (SGBs) help in Portfolio diversification?

  • Less Volatile: Sovereign gold bonds have lower volatility than equities, and an asset class with less volatility helps mitigate the risk. 
  • Not correlated: Gold often correlates less with other asset classes, such as equities and bonds. This means that during market volatility or economic uncertainty, gold prices may move independently or in the opposite direction to other investments. Holding SGBs can hedge against the volatility and fluctuations of other assets, thus reducing the overall portfolio risk.
  • Utility Value: The underlying asset of Sovereign Gold Bonds (SGBs) is gold. Gold is always in high demand, eliminating the risk of becoming worthless.
  • Inflation Hedge: Gold has historically been considered a hedge against inflation. During rising inflation, the value of gold also tends to increase. Including SGBs in a portfolio can help protect the portfolio’s purchasing power in times of inflationary pressure.

Benefits of Investing in Sovereign Gold Bonds

  • Less Risky: As mentioned, SGBs don’t have a relationship with the stock market, and the demand for gold is always high, which makes it less risky. Moreover, the RBI issues SGBs, which the Government of India backs. Hence, there is no credit risk associated with SGBs. However, market fluctuations may lead to some volatility in gold prices.
  • Convenience: The aim of introducing SGBs was to reduce the hassle involved with the physical gold. If you want to invest in gold but want to avoid holding it physically, SGBs are ideal.
  • Long-Term Investment: SGBs have a maturity of 8 years and a lock-in period of 5 years. If you are a long-term investor, SGBs are ideal.
  • Capital Appreciation: The price of yellow metal tends to rise in the long term, and during fluctuations in the stock market, gold is considered a good investment option.
  • Loan Facility: Sovereign Gold Bonds also act as collateral for getting loans from Banks or Non-Banking Finance Companies (NBFCs), and you can get up to 75% of the market value of SGBs as a loan amount. 
  • Regular interest: Interest on sovereign gold bonds is 2.5% p.a. (simple interest) and is credited every six months. If you are a conservative investor looking for a steady income from investment apart from capital appreciation, SGBs are an excellent option. 
  • Tax Advantages: No TDS is applicable on the interest received from SGBs. At the same time, you can transfer the bond before it matures and gain the indexation benefit on long-term capital gains. Also, if you hold the bond until maturity, the capital gain tax will be exempted. But the interest is taxable as per your income tax slab.
  • Discount in Secondary Market: Generally SGBs are traded at a discount in the secondary market due to low liquidity. Therefore you can invest in gold at a discount.

How Much of your Portfolio should be allocated to Sovereign Gold Bonds (SGBs)?

You must diversify your portfolio in a way that helps you in achieving your long-term financial goals, and it is crucial to develop a plan that considers your financial objectives and risk appetite. Experts recommend investing at least 10-15% of your total investments in gold, which includes SGBs and physical gold or any other ways to invest in gold. However, every investor has a different goal. So let’s have a look at different approaches for investing in gold, including SGBs and other gold investment options:

  1. 5-10% allocation to gold: If you are an aggressive investor and believe in the equity sector, but you want some amount to keep safe from unforeseen events, you can invest 5-10% of your portfolio in gold.
  1. 15-25% allocation to gold: If you are a beginner in the stock market and are a little sceptical about the country’s economy, consider investing more in Sovereign Gold Bonds (SGBs) or other gold investment options. It will provide you with better safety of your portfolio.
  1. 30-50% approach: If you believe that the economy is slow and there is a hike in the government debt, which may lead to an increase in inflation, then you may consider investing up to 50% of your portfolio in Sovereign Gold Bonds or other gold investment options.

Who Can Invest?

Under the Foreign Exchange Management Act (FEMA), any individual, HUF, any other trust, or university that is a resident can invest in SGBs. On behalf of a kid, a guardian may also make investments. A Permanent Account Number (PAN) is required to invest in bonds. While a non-resident Indian (NRI) cannot invest in SGBs, they may hold bonds received as a nominee of a resident investor until maturity.

An individual or a HUF may invest up to 4 kilograms in SGBs each fiscal year. Other qualified organisations, such as trusts, can invest up to 20 kg annually. Both investments made through initial subscriptions and stock exchange transactions are subject to these restrictions. SGBs may be jointly held or held separately. The permissible limit, however, will only apply to the first holder.


Taxes on the interest arriving from SGB is taxable as per the provisions of the Income-Tax Act of 1961. Short-Term capital gains (sold before 12 months) arising from the sale of the bonds are taxable in the same way by adding the income to the individual’s total income and according to the applicable taxes. In comparison, Long-Term capital gains (sold after 12 months) are taxable at 20% (if indexation is availed) or 10% (if indexation is not availed). Long-term capital gains are exempt if a bond is redeemed with RBI.

Final Words

Gold should be included in one’s portfolio because it acts as a hedge against inflation, you should invest in SGBs to protect against inflation and diversify your portfolio since they yield 2.5% simple interest, and capital gains at redemption are tax-free. However, it should be approximately 5-10 % of your investment portfolio.

Frequently Asked Questions

Is SGB better than FD?

FD (Fixed Deposit) yields tend to be lower than SGB returns. Still, they provide more safety in terms of volatility than SGBs. Your risk tolerance and objectives influence your selection. Eventually, an FD investment is the safer alternative.

Can I sell SGB anytime?

Even though the bond’s tenor is 8 years, early redemption is permitted on coupon payment days following the fifth year from the issue date. The bond can be traded on exchanges if it is kept in demat form.

How can I check my SGB value?

If you want to calculate the value of your SGB gold bonds at any time, follow the technique used by the RBI to compute the issue price. It is determined as the simple average of the closing prices of 999 pure gold over the previous three business days.

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Vaibhav Khandelwal

Credit Principal
Vaibhav is Chartered Accountant by profession, having experience of 4+ years in banking & finance sector. Since past one year associated with Wint Wealth as Credit Principal. Previously worked with Northern Arc Capital for 2 years in FI-Credit Team and AU Small Finance Bank for 1 year in LAP-Credit Team.

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