Introduction
Sovereign Gold Bonds ( SGBs) are alternative investment options to gold for physical investment in India because they are issued by the RBI. These bonds allow the investor to hold gold digitally , earn interest , and avoid capital gains tax if held to maturity, thus making SGBs a very attractive option for investors looking for secure , convenient , and profitable exposure to gold (Sovereign Gold Bond).
Sovereign Gold Bond
The new-form sovereign gold bonds offered by the government are an ideal substitute for holding bullion. The value of the bond, expressed in terms of gold grams, enables an investor to directly benefit from owning the yellow metal without having to hold the physical commodity. SGBs are released into the market by the Reserve Bank of India as agents of the Government of India. Indian Sovereign Gold Bonds are an excellent way to invest in gold.
The authorized modes allow investors to purchase such bonds, keep them until maturity, or sell them on stock exchanges , thereby capturing the upside in the prices of gold. SGBs offer other benefits as well , such as periodic interest payments , exemption from tax on capital gains in the case of holding them to maturity , and can be offered as collateral for loans. Thus, these sovereign gold bonds form an excellent investment avenue for those who are fond of gold or seeking portfolio diversification.
Key features of Sovereign Gold Bond
Sovereign Gold Bonds- Issued by Reserve Bank of India under the authority from the government of India, it provides sovereign gold bonds backing as well as credibility for the gold-linked instruments.
The denomination is in grams of gold, so that people could have an actual exposure to the precious metal and is issued in multiples of 1 gram to provide flexibility to the amount of investment into sovereign gold bonds.
This has a tenure of 8 years, but still, it offers an option of an exit after the completion of the fifth year, thereby offering some liquidity and also the ability to redeem early if needed.
Interest comes semi-annually at a rate of 2.50% per annum, which provides investors with income besides possible capital gains.
A sovereign gold bond scheme with Capital Gains Tax exemption will be available if kept till maturity; thus, tax benefits for investors holding for long periods.
They can be traded on stock exchanges so that the holders of these sovereign gold bonds have liquidity and can use these bonds as collateral for borrowings, which would make them more useful as an investment asset in sovereign gold bonds.
Advantages of Sovereign Gold Bond
Low Risk: Any investment product carries inherent risks associated with various financial instruments . However, since these bonds are issued under the guarantee of the Government of India, the possibility of defaulting on repayment is nearly zero. The only risk that an SGB faces is market volatility, which can cause price fluctuations for gold , thus affecting the returns from SGBs.
Convenience: The primary objective of SGBs is to make ownership of gold easy. Gold is often needed by Indian families for occasions and festivals, but it comes with several additional servicing and making charges. There is also the risk of theft associated with physical gold . The main advantage of SGBs is that they are completely digital, eliminating any extra charges related to their security.
Capital Appreciation: The capital appreciation realized upon redemption will be entirely tax-free. Additionally , since gold consumption is widespread , the prospects of significant fluctuations in the intrinsic value of gold are minimal . This allows the investment corpus to grow without being affected by market fluctuations and global economic conditions .
Hedge Against Inflation: A high inflation rate in a country renders a currency less effective for making purchases, significantly impacting returns. High inflation typically leads to an increase in the price of gold. Investment in gold schemes serves as an inflation hedge , and sovereign gold bonds are no exception .
Indexation Benefit: Indexation is another advantage of sovereign gold bonds . Amid substantial inflation, it elevates the price of an investment while keeping returns unchanged. Gold bonds are somewhat lenient in this regard . For long-term capital gains from sovereign gold bonds, indexation benefits apply . This adjustment allows you to modify your investment’s purchase value in light of inflationary effects. It also aids in calculating how much your invested amount has increased in value concerning the actual capital gain.
Disadvantages of Sovereign Gold Bond
Long Holding Period: A long maturity period of 8 years is a significant constraint for many investors looking to invest in gold bonds. In fact , the current long tenure can be seen as a major advantage of gold bonds. By establishing such a lengthy maturity, the government has protected its investors from potential losses resulting from fluctuations in gold prices . An important feature is that investors also have the flexibility to redeem the bond after just 5 years from the date of investment.
Capital Loss: Investments in SGBs are accompanied by the risk of capital loss since the price of bonds is based on international gold market prices. This implies that when you purchase the bond, you may pay a high price relative to the redemption value at maturity , resulting in a loss . However, it should be noted that gold is a significant commodity , and the government genuinely attempts to maintain stable prices for the metal. If you remain invested for 5 to 8 years, capital losses are highly unlikely , although they cannot be completely eliminated .
Liquidity: Since an early redemption of SGBs can occur only after 5 years, they are less liquid than the physical gold. Trading volume and frequency may also be limited in the stock exchanges.
Conclusion
Sovereign Gold Bonds provide a safe and hassle-free medium for investment in gold by earning interest and exempting one from paying taxes. Despite their long lock-in period and poor liquidity, these bonds are the perfect proposition for long-term investors, further fulfilling the requirements of diversification and inflation hedging without the hassles of storing bullion (Sovereign Gold Bond).