Weddings and festivals in India are incomplete without gold, a popular investment option. However, it’s not always convenient to buy and store physical gold. The Government of India (GoI) introduced sovereign gold bonds (SGBs) in 2024to facilitate hassle-free investment in gold.
These government securities are denominated in grams of gold and are effective substitutes for physical gold. The issue price has to be paid in cash; even on maturity, the redemption of SGBs will occur in cash.
Let’s explore how to buy sovereign gold bonds and more details.
How to Buy Sovereign Gold Bonds Online?
You can buy sovereign gold bonds from the secondary market at NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). However, you can also buy sovereign gold bonds online from scheduled commercial bank’s official websites. Check out these steps to learn how to buy sovereign gold bonds online.
- Step 1: Visit your scheduled commercial bank’s official net banking site and log in with your credentials.
- Step 2: Navigate the cursor to the ‘e-service’ option and select the ‘sovereign gold bond’ option.
- Step 3: Check the terms and conditions minutely before proceeding to the next step.
- Step 4: You’ll be redirected to the registration form. Enter all the details with care and click on ‘submit’.
- Step 5: Fill up the subscription quantity along with the nomination details in the purchase form.
- Step 6: Don’t forget to verify all the details before clicking on the ‘submit’ button.
Apart from scheduled commercial banks, you can also invest in sovereign gold bonds through brokers’ websites or apps.
How Do Sovereign Gold Bonds Work?
The Reserve Bank of India issues sovereign gold bonds in various tranches during a financial year. You’ll be able to procure these government securities through banks, post offices, online platforms, and brokers.
You can purchase SGBs in physical, digital, or dematerialised form. If you purchase SGBs in the physical form, you can request that the bonds be credited to your demat account. RBI will take some time to process the dematerialisation.
GoI and RBI have come up with certain measures to promote the purchase of SGBs online. Investors who purchase SGBs online will receive a discount of Rs. 50 per gram.
One SGB is equal to one unit of gold. Generally, they get denominated in one unit of gold or its multiples. These government securities come with a maturity period of 8 years, which can be further extended by 3 years.
Moreover, if you purchase SGBs directly from the GoI through the primary market, you can sell them back to the government after holding them for 5 years. If you hold SGBs in a demat account, you can sell them at any time at your convenience on a stock exchange.
The fixed interest rate of SGBs is 2.50% per annum, and it’s applicable to the initial investment amount. You’ll receive the amount semi-annually in your bank account.
Why Should You Invest in Sovereign Gold Bonds?
In the previous sections, We explored how to invest in gold bonds and how this government security works. Now, let’s take a look at the reasons why you should invest in sovereign gold bonds in the first place:
1. It’s a Safe and Secure Investment
Considering that SGBs are issued by the Government of India, this investment option has a high level of security. No default risk is associated with SGBs. A significant benefit is that there’s no risk associated with the security and physical storage of SGBs.
2. Additional Interest Income
You can earn a guaranteed 2.50% rate of interest on the issue price every year. You can build up a corpus with this additional amount. It can be of great help during financial emergencies.
3. Benefit From Capital Appreciation
The price of sovereign gold bonds is linked to the gold price. If gold prices rise during the time you’re invested in SGBs, you’ll benefit from capital appreciation.
4. Investment in SGBs Acts as a Hedge Against Inflation
Investing in SGBs as gold has acted as a hedge against inflation, preserving the purchasing power. An important feature you need to note is that gold prices rise during inflation.
5. Benefit of Indexation
You’ll get the benefit of indexation on long-term capital gains on sovereign gold bonds. It will help you to analyse and re-adjust your investment’s purchase value by considering the impact of inflation. Moreover, it will also help you to calculate your real capital gain and the new investment value.
Is There A Minimum and Maximum Limit for Investing in SGBs?
When you have decided to invest in sovereign gold bonds, you should make a minimum investment of 1 gram. You should also be aware of the maximum investment limit with respect to SGBs.
Individuals and HUFs (Hindu Undivided Families) can make a maximum investment of 4 kilograms when it comes to sovereign gold bonds. On the other hand, trusts, charitable organisations, and universities can invest a maximum of 20 kilograms with respect to SGBs.
What Are the Risks Involved With Investing in SGBs?
While it’s true that the level of risk associated with sovereign gold bonds is much lower, it’s not entirely devoid of risk.
Let’s check the risks involved with investing in sovereign gold bonds:
1. Interest Rate Risk
There’s a fixed interest rate in sovereign gold bonds. If the interest rates undergo a significant rise in the future, there will be an increase in the opportunity cost of holding SGBs. Moreover, high-interest rates may make other investment options more lucrative than SGBs. It would also lower the returns generated by SGBs.
2. Movements in Gold Prices
The value of sovereign gold bonds is directly related to gold prices, which can undergo fluctuations. Suppose the prices of gold reduce during the timeframe of your investment. It would lead to a reduction in the value of your sovereign gold bonds.
3. Risks Related to Premature Exit
If you sell off your SGBs before maturity, it may lead to liquidity issues. The main reason behind this factor is that the trading volume of SGBs in the secondary market can be much lower than other instruments. So, in case an investor decides to redeem his investments in SGBs before maturity, he may face losses.
4. Changes in Regulation
If the GoI introduces new regulations or tweaks the existing ones, there might be a negative impact on the benefits, taxation, and terms of SGBs. Moreover, the availability and frequency of SGB tranches may vary based on the government’s decisions. It may have a negative impact on investment opportunities.
Eligibility Criteria for Investing in Sovereign Gold Bonds
According to the guidelines provided by the Reserve Bank of India, the following entities can buy sovereign gold bonds:
- Individuals residing in India
- Hindu Undivided Family (HUFs)
- Minors (through their parents or guardians)
- Trusts, Charitable Organisations and Universities
- Joint Holders
Please remember that there’s a list of entities that are not eligible to buy sovereign gold bonds:
- Non-Resident Indians (NRIs), Persons of Indian Origin (PIO) and Overseas Citizens of India (OCI)
- Private Limited Companies
- Limited Liability Partnerships (LLPs)
- Firms
Conclusion
Now, you have a fair idea about buying sovereign gold bonds and much more. These are convenient, safe, and secure investment options for investors. Apart from receiving an interest income, you’ll also benefit from capital appreciation. Don’t forget that you must have your PAN card if you wish to invest in SGBs.
FAQs
Yes, joint holding is allowed if you wish to invest in sovereign gold bonds.
After maturity, the sovereign gold bonds will be redeemed in Indian rupees. The redemption price will depend on the simple average of the closing price of gold of 999 purity. Please note that the gold price of the previous 3 business days from the repayment date will be taken into account. The India Bullion and Jewelers Association Limited will publish all the details.
Yes, each family member can buy 4kg SGB in their name, provided they fulfil the eligibility criteria. People who reside in India, as provided under the Foreign Exchange Management Act, 1999, fulfil the eligibility criteria to invest in SGBs. Individuals, trusts, HUFs and charitable organisations can invest in SGBs. People who have seen a change in their residential status from resident to non-resident may hold SGBs till early maturity.
The eight-year maturity period is too long for some people. The fact that one can invest in SGBs only during a specified period might be challenging for investors. Moreover, one cannot rule out the possibility of a loss of capital.
While filling out the application form for SGBs, investors must not forget to provide their PAN details.
Disclaimer
This article is solely for educational purposes. Stable Money doesn't take any responsibility for the information or claims made in the blog.
