Gold has always been considered a safe haven asset, a store of value, and a hedge against inflation. Investing in gold can be done in various forms such as buying physical gold, gold ETFs, gold mutual funds, and sovereign gold bonds.
While buying gold in physical form has always been in fashion, investing in sovereign gold bonds is also a great way to diversify your portfolio without having to worry about storage and security.
Sovereign Gold bonds are issued by the Reserve Bank of India (RBI) and are backed by the government, which makes them a safe and secure investment option. If you have low-risk tolerance, gold bond investments can be a good choice for you.
In this guide, we’ll cover everything you need to know about gold bond investment in India, including the benefits, risks, and how to buy gold bonds.
What Are Sovereign Gold Bonds?
Sovereign gold bonds are government-backed debt instruments issued by the RBI.
They are denominated in grams of gold, and the investor benefits from the rise in gold prices without having to worry about storage or security. They are also eligible for stock exchange trading and are considered liquid assets.
Benefits of Sovereign Gold Bond Investment
Here are some of the advantages of Gold Bond Investment.
- Safety: One of the primary advantages of investing in gold bonds is the safety and security that comes with government backing. Because gold bonds are issued by the RBI, investors can be confident that the bonds are secure and that their investment will be protected, eliminating the risk of default on this investment.
- Convenience: Gold bonds can be held in Demat form or as RBI certificates, both of which are far more convenient than holding physical gold.
- Stable Returns: The government issues sovereign gold bonds at a discount to the average gold price. The bond’s return will be equal to the current gold price when it matures. In addition, your bond will receive a fixed annual interest rate of 2.5%, paid semi-annually.
- Tax Efficiency: If you are a long-term investor willing to hold gold bonds for the full tenure of eight years, you’re eligible to get tax-free capital gains.
It’s also worth mentioning that Gold Bonds are eligible for indexation benefit, which means that the capital gains arising on redemption of the Gold Bonds will be taxed at indexed cost. This can help to reduce the tax liability of the investor.
However, like any other investment, gold bond investment also comes with certain risks.
Drawbacks of Investing In Sovereign Gold Bonds
Here are some of the disadvantages of Gold Bond Investment.
- Longer Maturity Period: Gold bonds, which mature in eight years, may not appeal to investors looking for short-term gains. However, the long maturity period can help investors avoid volatility in the gold price.
- Capital Loss: SGB bonds are tied to the price of gold on international markets. If the price of gold falls below the price you paid for the bond, you will have lost money on your investment. However, government policy ensures that gold remains a valuable commodity and that its price does not fluctuate wildly. And if you hold till maturity chances of suffering a loss are slim.
- Limited Availability: Gold bonds are only available in tranches and can only be sold when the government opens the repurchase window after 5 years. SGBs are normally listed on the stock exchanges at the end of 6 months of issue, but secondary market trading is very thin. Either you do not get liquidity or prices are too skewed.
Now, let’s take a look at how to invest in sovereign gold bonds
How To Invest In Gold Bonds?
Sovereign Gold Bonds can be purchased in joint holdings. You can invest in as little as one gram of gold and as much as four kilograms.
Sovereign Gold Bonds can be purchased at any designated bank, such as SBI and HDFC Bank with cash payments (up to a maximum of Rs. 20,000), cheque payments, or demand draft payments.
Sovereign Gold Bonds can also be purchased from the Stock Holding Corporation of India Ltd (SHCIL), the Clearing Corporation of India Ltd (CCIL), designated post offices, and recognized stock exchanges such as the National Stock Exchange of India Ltd and the Bombay Stock Exchange Ltd. Brokers and authorized online marketplaces can also assist with the purchase.
How to invest in sovereign gold bonds online?
You can apply for it by going to the bank’s website and clicking on the ‘Investment’ tab. Each bank will have its own menu-driven process, but the methods are generally the same.
If you prefer to apply in person, you can do so by gathering subscription forms and submitting them to designated banks along with your payment.
You will need your PAN/Aadhaar Cards as part of your KYC. Once the details are verified you will be issued the bonds.
Investing in gold via SGBs is easier and faster. Furthermore, the government guarantees the principal in gold units as well as the regular payment of interest, so there is no risk of default. Gold also reduces the risk of an equity and bond portfolio during uncertain times, as gold typically performs best during times of uncertainty.
Sovereign gold bonds offer investors a low-risk method of investing in gold, with minimal hassles.
Investing in SGBs is a better alternative to physical gold because it eliminates the risks and costs associated with physical gold. SGBs are held in the RBI’s books or in demat form, removing the risk of loss, theft, and so on.
The Reserve Bank of India issues sovereign gold bonds on behalf of the central government in accordance with the Government Security Act of 2006. Because of this government backing, sovereign gold bonds are one of the safest forms of investment available in India, with no risk of repayment default.
SGB and FD investments are both low-risk investments, but they operate in different ways. FDs provide a lower return than SGBs, but they are less susceptible to market fluctuations. SGBs offer higher returns and are also subject to market volatility. So it is important to decide based on your financial objectives.
SGBs have an 8-year maturity period after which they are exempt from capital gains tax.
However, if you leave after 5 years, you will be subject to capital gains tax.