Top 10 Reasons To Invest In Sovereign Gold Bonds (SGBs)
Investing in gold through Sovereign Gold Bond (SGB) is simple and quick. The principal is in gold units, and the regular interest payments are guaranteed by the government. It's believed Sovereign Gold Bond (SGB) is a good investment tool as there is no risk of default. Moreover, gold lowers the risk of bonds and equity portfolios in uncertain times as gold usually performs best when there is uncertainty. Along with this, storing physical gold safely could be difficult, too. A bank locker at times is quite expensive while storing gold at home can be risky. Hence, Sovereign Gold Bonds (SGBs) eliminate these hassles and provide better investment opportunities, safety, and ease of storage. The gold bond scheme is known to be an excellent substitute for physical gold.
As a reader, you might be wondering why should you purchase SGB rather than physical gold- What are the benefits? One of the main positive benefits of investing in SGB is that the quantity of gold, you are paying for, is protected; you'll receive an ongoing market price at the time of redemption/premature redemption. SGB offers a superior alternative to holding gold in physical form because the costs and risks of storing it are eliminated. As an investor, at the time of maturity and periodical interest, you are assured of the market value of gold. SGB doesn't bear any of the issues like making charges and purity when it comes to gold in jewellery form. The SGB bonds are preserved in the books of the Reserve Bank of India (RBI) or demat form, this eliminates the risk of loss of scrip etc.
In this blog, we will discuss the following topics:
- Why Should You Invest in Sovereign Gold Bonds (SGBs)
- Features of Sovereign Gold Bonds (SGBs)
- Top 10 Reasons Why Sovereign Gold Bonds (SGBs) are a Good Investment
- Can Sovereign Gold Bonds (SGBs) be converted to Physical Gold?
For Indians, the reverence for gold goes way beyond its market value. In today's world, there have been various ways developed to possess gold without its inherent risks and/or bearing making and wastage charges. One such alternative is Sovereign Gold Bonds (SGBs), offered by the Government of India and the RBI. In SGBs one can own gold in a ‘certificate’ format. The investment procedure can be done through a nationalised bank, scheduled private or foreign bank, or in an India Post Office. One can even invest via the Stock Holding Corporation of India Ltd. (SHCIL) and authorised stock exchanges. An investor can also invest in gold bonds online. To know more about SGB, their interest rates along with taxation rules on them, please click here.
Why Should You Invest in Sovereign Gold Bonds (SGBs)
As an investor, you must be keen to know why you should invest in SGB- The answer is, along with being simple, SGB is non-physical and offers interest over and above the gold price appreciation. One of the vital benefits of these bonds is that they offer a good hedge to the overall portfolio during tough times.
With these bonds, it is like a play on the price of gold, without the hassles of physical ownership. There's no worry about depletion, storage, and custody of the gold. SGBs are held in demat form or as certificates issued by the RBI. Both these types are a lot simpler than holding physical gold. If you are a long-term investor, holding SGBs for the full tenure of 8 years will fetch you tax-free capital gains. Overall, SGBs scores when it comes to safety, simplicity and asset diversification.
Features of Sovereign Gold Bonds (SGBs)
The following are some key features of Sovereign Gold Bonds (SGBs):
Fixed price: The gold bond's price is based on the average closing price of gold of 99.9% purity that's published by the India Bullion and Jewellers Association Ltd. (IBJA). The average is computed on the price of the prior three business days of the week before the subscription period.
Fixed Interest Rates: The SGB scheme offers a fixed rate of return, which is 2.5% per annum, and it's distributed twice a year.
Tenure: The tenure of SGBs is of eight years. However, one can choose to exit it from the fifth year, only on the interest payout dates.
Denomination/Value: One can invest in gold bonds in denominations of one gram of gold. Moreover, the minimum investment should be equal to at least one gram of gold, and the maximum is up to 4 kg for individual investors and HUFs. Trusts and corporations can invest in SGB up to 20 kg of gold.
Taxability: SGB offers two types of returns, interest and capital gains. Capital gains are classified as short-term and long-term. One doesn't have to pay long-term capital gains tax on its profits if it has held the bond for the entire eight years. However, long-term gains gained from resale after holding the SGB for three years or more will get taxed at 20%, along with indexation benefits. On the other hand, short-term capital gains gained from the resale of SGB held for less than three years get added to the individual's yearly income and taxed according to the tax slab it falls in.
Eligibility Criteria: Those who are Indian residents, be it individuals, Trusts, HUFs, universities, and charitable institutions, can invest in SGB. Investing on behalf of a minor is also allowed.
Issuance of Bonds: SGBs are issued only by RBI on behalf of the Central Government, and are traded on the Stock Exchange. SGBs get issued in multiples of one gram of gold, and investors will obtain a Holding Certificate for it. As an investor, you can even convert the gold bond to Demat form.
SLR Eligibility: When banks acquire the bonds after the process of invoking lien, pledging or hypothecation, they're then accounted for SLR. When the capital has to be maintained in gold, cash, and/or approved securities by a commercial bank before offering credit to the customers, is called Statutory Liquidity Ratio.
Redemption Price: It's only in Rupees the redemption price has to be based on the average of closing price of gold of 99.9% purity in the previous three working days.
Commission: As a commission for the distribution of the bond, the receiving offices will levy 1% of the overall subscription amount. From this commission, they share at least half with the intermediaries like agents or brokers.
Top 10 Reasons Why Sovereign Gold Bonds (SGBs) are a Good Investment
Traditionally it's believed investments in gold will never fail. However, the investments made in physical gold bear a few drawbacks. For example, one has to pay a high making charge for making gold jewellery and arrange for its safe storage. Both these reasons considerably can affect the returns. Hence, you might wonder if there is a better alternative for investing in gold to make your portfolio more diversified. The answer is yes, it's Sovereign Gold Bond (SGB) as it eliminates these common drawbacks while also entitling one to enjoy the benefits of investing in the precious metal.
Find below the top reasons why you should make this gold investment scheme an ideal investment option:
- Low risk: Since SGBs are backed by the Government of India, it makes them a safer investment option. They are relatively stable against volatility because gold is one of the strongest hedges against market instability and inflation.
- There're no extra charges: Unlike physical gold, which has associated costs such as making charges, exchange fees, etc., SGBs don't have any additional charges. As per the prevailing rates, we get the value of the bond, and since one doesn't have to store bonds physically, it saves money that would otherwise have to be spent on a bank locker.
- Cost-Efficient: Investment in SGB is known to be more cost-efficient when compared to investing in physical gold or other gold products such as gold ETFs. For physical gold, there is usually a making charge that can be at least 10% of the value of the gold. Likewise, with gold ETFs, there is a 1% expense ratio. However, when it comes to SGB, there are no such charges involved, and you can purchase as little as 1 gram of gold.
- Safety and security: Storing SGBs is easy and safe. No hassles are involved as with physical gold. One can hold the bonds in a dematerialised form in a Demat account. Do note is not mandatory to have a Demat account to invest in gold bonds.
- Fixed interest: Irrespective of the ups and downs in the gold prices, one earns a fixed amount (2.5%) by interest from the investment by the RBI, hence, the earnings are guaranteed. This is over and above the appreciation in the price of gold. For this reason, gold bonds are more rewarding because we don't earn any interest when making investments in physical gold.
- Tax benefits: No Tax Deducted at Source (TDS) is applicable on the individual's gains as long as it holds the investment until maturity. This enables maximising the person's profits. Moreover, one can even obtain the indexation benefit if the SGB gets transferred before the maturity period. Redemption after maturity is exempt from capital gains tax. However, if one sells the bond on exchanges after the 5-year lock-in period, they'll be required to pay taxes on the gains or losses.
- Assured purity: Talking about the purity of physical gold, it could be a concern since there is no guarantee, and every seller might be selling a different product. However, in the case of gold bonds, we can be assured we are investing in the highest quality gold backed by a sovereign guarantee.
- Flexibility: SGBs are claimed to be the best investment options in terms of flexibility. This is so because they allow joint holding, and minors can also invest in these bonds via their legal guardian. Some banks even offer online discounts for investing in SGBs.
- Long-Term Investment: The maturity period for SGBs is 8 years, but one can exit it after 5 years, too. Those who are experienced as an investor might already comprehend how longer lock-in periods enable them to become disciplined investors and achieve investment objectives. With the money locked in for at least 5 years, SGB is popularly known to be the best investment option for investors who aim for long-term capital growth.
- Easy tradability: Unlike the different forms of investment, which face a liquidity problem, gold bonds are highly liquid. They're easily traded on stock exchanges but within a certain duration at the issuer's discretion. For example, if one has invested in SGB 5 years ago, it can sell the same at NSE or BSE. However, do note if you are holding the bonds in large quantities, it might not be possible to have a ready buyer for such large quantities.
To know more about SGB's features please click here.
Can Sovereign Gold Bonds (SGB) be converted to Physical Gold?
You can't convert SGBs to physical gold. In fact, one of the main purposes of SGB is to opt for a long-term investment. Although SGBs are listed on the stock exchange and are traded in demat format, converting SGB to physical gold isn't possible. They are always available only in digital or paper format. SGBs are issued for 8 years, but one may encash and/or redeem them after the fifth year from the date of issue on coupon payment dates.
Conclusion
In India, gold is always viewed as one of the best investment options and a solid financial asset. It is culturally relevant along with being a vital part of festivals and celebrations. Some also believe gold brings good fortune and luck. However, if brought in the form of jewellery, coins, and/or bars sometimes it does have some limitations. Despite the several risks in Sovereign Gold Bonds, they have emerged as a veritable method of investing in gold, which bears minimal risk and hassles. In fact, investing in SGB is a great way to diversify the risk of the portfolio. This new-age investment option further strengthens the significance and relevance of gold in financial security. With gold-linked returns, lower risks, assured purity, and government-backed security, gold bonds are undoubtedly an excellent addition to your portfolio.
