Investment Basics – All About Sovereign Gold Bonds

Investing is important because parking your hard earned money in your savings account will not help you create wealth. Factors such as financial emergencies, changing market trends, and more importantly inflation will have an impact on your monetary health unless you invest in schemes that offer a good interest rate.

Today, let us talk about an investment option that will help you grow your wealth – Sovereign Gold Bonds or SGBs.

What are Sovereign Gold Bonds

Investing in gold has been steeped into the cultural fabric of the country. India is also one of the largest consumers of gold in the world. But gold is quite volatile and having a ton of gold jewelry at home is not safe either.

But what if you could invest gold in a safe and timely manner without having to purchase the actual metal while also gaining additional interest at the same time?

SGBs are the perfect alternative to physical gold investment. This scheme is offered by the Government of India and are essentially certificates that are issued against a certain gram(s) of gold. This scheme was launched in 2015 and allows individuals to invest in gold without having to worry about storing physical gold. The bond is issued by the Reserve Bank of India on behalf of the Indian government.

features of sovereign gold bonds

Features of Sovereign Gold Bonds

Here are some of the salient features of Sovereign Gold Bonds –

  • Bonds are issued in multiple of grams of gold with a basic unit of 1 gram
  • The tenure of this scheme is 8 years with an option to exit after the 5th year
  • You can join this scheme through most nationalized banks, designated post offices, etc. If you purchase this scheme online, you can get a discount of Rs. 50 per gram
  • Individuals and HUFs can invest in a maximum of 4kg of gold while trusts and other entities can invest in 20kg of gold per fiscal year
  • Value of the bonds will be in Indian rupees and is fixed based on the average of the closing price of gold of 999 purity for the previous 3 business days of the week, prior to the subscription period. Redemption is also based on a similar criteria
  • The interest rate offered for gold bonds is 2.50% per annum. Investors will also receive certificates for their purchase

benefits of sovereign gold bonds

Benefits of Sovereign Gold Bonds

You may wonder what the hype about SGBs is about. After all, wouldn’t it be easier to just purchase gold in the form of coins or jewelry? 

But here’s why SGBs are beneficial –

  • While buying physical gold is an option, you will have to worry about the safety and risks of storing it. This is eliminated by purchasing gold bonds
  • Sovereign Gold Bonds are held in demat form or in the RBI books therefore, there is no risk of loss or safety
  • Additionally, the selling price of jewelry is usually much lower than the purchasing price thanks to making charges, purity concerns, and other similar impositions. All of these problems can be eliminated with gold bonds
  • As an investor, the quality of gold that you have invested in is also protected and you receive the ongoing market price at the time of redemption
  • You can enjoy interest payouts on your investment which is not the case with physical gold
  • These securities can also be used as collateral for loans from banks and financial institutions
  • If the bonds are held until maturity, then your returns will be exempt from capital gains tax

things to keep in mind before investing

Things to Keep in Mind Before Investing

Buying gold is not just rooted in Indian tradition, it is also seen to be a great investment avenue as the returns will only increase every year. However, owning physical gold comes with its own set of challenges which are eliminated by Sovereign Gold Bonds.

However, investment is not a one-size-fits-all. Everyone’s financial needs and goals are different therefore investing blindly in a scheme is foolhardy.

SGBs come with a lock-in period of 8 years therefore if you wish to hold long-term investments then this is a great option. But if you are planning to get married in a few years or wish to use the returns to fund your home or education, unless you are willing to wait for 8 years, opting for other investment avenues is recommended.

Gold returns are inversely proportional to the stock market so if the stock market performs well, then gold rates will fall. As is the case with most investments, this investment type is also volatile and will have risks attached. If your risk appetite is on the lower side, why not opt for safer investments such as RD/FDs?

At the end of the day, ensure that you choose an option that works for your monetary goals while keeping your risk appetite in mind.