For Indians, gold is one evergreen investment – the love for which never fades. There are some problems with gold investment – the biggest being security. Now you don’t have to worry about investing in gold as there is an alternative and a better one – Sovereign Gold Bond (SGB).
What is Sovereign Gold Bond?
The Sovereign Gold Bonds are backed by RBI and the Government of India. The scheme was made public in November 2015 as an alternative to physical gold. It is one of the safest options for investment as it is backed by GoI and RBI.
SGBs have gold as the underlying asset, and the price is denominated in grams of gold. The issue price is the average closing price of the last three working days of 999-purity gold as given by the Indian Bullion and Jewellers Association.
Who can invest in Sovereign Gold Bonds?
Indian residents as defined under the Foreign Exchange Management Act, 1999 are eligible to invest in SGB. Eligible investors include individuals, trusts, HUFs, universities, and charitable institutions.
If your status changes from resident to non-resident, you may continue to hold SGB till maturity or early redemption.
How to buy Sovereign Gold Bonds?
You cannot buy SGB as and when you want to. They are intermittently available for investment – the government releases them in tranches. The price is announced per gram every time the window is opened. You can invest in multiples of a gram.
You can purchase it from offices of nationalized banks, scheduled private banks, scheduled foreign banks, Stock Holding Corporation of India, designated post offices, and authorized trading members of stock exchanges.
You can apply offline by downloading the application form from RBI’s website. However, if you apply for it online, you get a Rs 50 discount per gram.
Why should you invest in SGB?
- There is no risk of theft when you invest in SGB. When you invest in physical gold, there is worry about storage, and safety is a big issue.
- When you buy physical gold, there is a making charge. When you invest in SGB, there is no such fee.
- The gold bonds can be redeemed on maturity or prematurely in the secondary market. You can get in touch with an advisor to find out how to do it.
- One of the biggest advantages of SGB is interest payout. You get a fixed annual interest rate of 2.5% on the amount you invest in SGB. The interest payment is made every six months to the investor. It is on top of gold price appreciation.
- There are tax benefits associated with SGB. There is no TDS on the interest you receive from your SGB investment. The capital gains tax is exempted if you redeem the bond after maturity (8 years).
What are the drawbacks of Sovereign Gold Bonds?
Before you invest in SGB, you must also understand the drawbacks. Below are a couple of drawbacks:
- Lock-in: It is a long-term investment as the lock-in is eight years. We believe that the government has kept the maturity long to prevent losses for the investors due to gold price volatility. Though the lock-in is eight years, investors can redeem their investment five years after the investment date.
- Capital Loss: You will have to stay invested for 5 to 8 years. The price of your investment is directly linked to the gold price in the international market. If the price goes down, you may incur a capital loss. Since the investment duration is long, the chances of it are minimum.
Should you invest in Sovereign Gold Bond?
If you plan to diversify your portfolio, SGB is one of the best options to explore. The tax benefit, government guarantee, and interest payment make it an attractive investment.
The vital question in front of investors is on the percent – how much allocation to have in gold? There is no universal answer to this question – it depends on your investment goals and risk profile. We at Right Horizons can help determine the correct gold allocation for you. Get in touch with us and leave all your investment worries so you can enjoy life.