Gold Investments

Are Sovereign Gold Bond Schemes a good investment?

Gold is an investment that never goes out of fashion. Gold promises safety and is a traditional investment in many Indian households. Over time storage, quality, charges, and theft have bothered gold investors. The Sovereign Gold Bond Scheme resolves all these problems.  It is an excellent investment in gold for a long-term saver.

Sovereign Gold Bonds are issued by the RBI on behalf of the Indian Government. Each bond is denominated in grams of gold. On maturity, the grams will be redeemed, and cash will be deposited in the investor’s bank account. Sovereign gold bonds are a lucrative alternative to physical gold.

What is the benefit of sovereign gold bond?

Gold Price:
The number of grams issued is based on the prevailing gold price. For individual investors investing digitally the issue happens at a discount of Rs. 50/gram to prevailing gold prices. This means an investor makes an added profit. When the bond matures, the gold is sold at prevailing market rates. So, an investor gets market rates at entry and exit.

When it comes to physical gold, investors almost never get entry and exit prices. They must deal with making charges and wastage. The seller and buyer are different entities offering different rates.

When savers buy physical gold, they must find a way to store their precious investment. Bank lockers and safes have maintenance costs. Whereas with a sovereign gold bond, everything is digital. You needn’t pay any costs towards storing and maintaining your assets.

Physical gold must be evaluated by an expert for quality. Sovereign Gold Bonds offer the highest quality and security. They are issued by the RBI on behalf of the Government of India. These bonds are of sovereign quality.

The Sovereign Gold Bond Scheme pays an interest of 2.50% p.a. on the bonds. The interest is credited once in six months to the investor’s account.

Can I buy Sovereign Gold Bonds without a demat account?

Sovereign gold bonds can be credited into your demat account. It is also possible to buy sovereign gold bonds through a bank without a demat account. Chat with us to make an investment in sovereign gold bonds.

Advantages of investing in Sovereign Gold Bonds

Sovereign gold bonds are a smart way to invest in gold for many reasons:

  1. If the bonds are held until they mature capital gains are exempt from tax.
  2. This is the only form of gold investment that offers a cash flow. With SGB there’s a guaranteed interest payout of 2.5% p.a.
  3. The issue price for digital payments is at a discount of Rs. 50 per gram.
  4. SGB is issued by the RBI on behalf of the government and has a sovereign guarantee.
  5. Allotment is guaranteed as long as the investor meets the eligibility criteria. Unlike other bond issuances, this does not depend on supply and demand.
  6. Indexation benefit applies to long-term capital gains on the bonds.
  7. The bonds can be transferred as gifts
  8. SGB may be used as collateral to avail gold loans.
  9. Bonds are tradable upon listing
  10. Minimum investment starts at 1 gram of gold. Individual investors and HUF can invest up to 4 kilograms in a year. Trusts and Institutions can purchase up to 20 KG in a year. A year is defined from April-March.

Sovereign Gold Bond 2021-22

The calendar for SGB issuance per the RBI’s website for 2021-22 is:

Tranche Start Date End Date
2021-22 Series IX Jan 10, 2022 Jan 14, 2022
2021-22 Series X Feb 28, 2022 Mar 04, 2022

Limitations of gold bonds?

Sovereign Gold Bonds do have some limitations. SGB are not widely traded in the markets. So premature exit may be difficult even though it is permitted. Second, there is a possibility of capital loss in SGB if the gold prices at the time of maturity are lower than the gold prices at the time of purchase. However, the number of grams of gold remains the same. There is also a cap on how much investors can put into the SGB scheme. For individuals and HUF it is 4 KG per year and for Trusts and institutions it is 20 KG.

Sovereign Gold Bonds are an excellent investment option for those with an investment horizon of more than 8 years. An investor who is willing to hold the bonds until they mature will reap the benefits of the SGB scheme.

Premature Withdrawal Conditions

The term of a Sovereign Gold Bond is 8 years. Sovereign gold bonds are tradable on the exchange within 14 days of issue. The appetite for SGB in the secondary market is less, making them illiquid. Exit is allowed on every interest payment date from the 5th year till the 8th year.

How to invest in gold?

Gold is a timeless investment. Traditional routes of investment include gold coins and jewellery. Jewellery cannot always be considered a financial asset, as it has sentimental value and serves a different purpose. Gold bars are also another popular way to invest in physical gold. All physical gold investments carry making charges and wastage. This eats into the value of the investment. More importantly, exiting these investments is harder as they are not liquid.

More investor friendly options are available in today’s market. One can chose between Gold ETFs, Gold Mutual Funds, and Sovereign Gold Bonds. Digital forms of gold have low charges and offer the best quality.

Gold Exchange Traded Funds vs Gold Mutual Funds vs Sovereign Gold Bond Scheme

Gold ETF Gold MF SGB
Short-Term Capital Gains (STCG) Slab rate Slab rate Slab rate
Long-Term Capital Gains (LTCG) 20% with Indexation Benefits after 3 years 20% with Indexation Benefits after 3 years Exempt from capital gains if held to maturity or 20% with Indexation Benefits after 3 years
Interest Not Applicable Not Applicable 2.5% p.a. (taxable)
Liquidity Moderate High Low
Term of Investment Flexible Flexible 5 -8 Years
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