Gold is an integral part of Indian culture and traditions and is one of the oldest investment instruments. In the history books, investing in gold has been demonstrated to be a reliable hedge against inflation. That said, if you are looking at gold purely from an investment standpoint, the physical form dissuades some investors.
However, we live in the age of the Internet. The financial system has designed a solution to solve the aforementioned issue. Today, you can invest in gold digitally through Sovereign Gold Bonds (SGBs).
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Three Key Things to Know about SGBs
1. SBGs are government securities.
2. The Reserve Bank of India (RBI), on behalf of the Government of India, issues SBGs.
3. SGB schemes are denominated in grams of gold.
So, basically, Sovereign Gold Bonds offer a digital pathway for the retail investor to invest in gold. That said, let’s now look at the various aspects of Sovereign Gold Bonds, including Sovereign Gold Bon strategies and the pros and cons of the assets.
The Purpose of Sovereign Gold Bonds
As mentioned above, these bonds were introduced by the Government of India in 2015 to let investors invest in gold without actually having to purchase the physical asset. As the Government of India backs gold bond schemes, SGBs are considered a less risky investment opportunity for retail investors to enter the gold market, which makes the Sovereign Gold Bonds strategy a suitable strategy for risk-averse investors.
The bonds offer a government-backed guarantee on the invested capital and potentially an even better return than physical forms of gold. They can be held in a Demat account or physical holding certificates; mainly, investors prefer the former option.
Four Features of Sovereign Gold Bonds
The following are four key features of SGBs that will help you work on your Sovereign Gold Bond strategies.
- Retail investors and corporate bodies can invest in SGBs. The minimum initial investment to be made is 1 gm of gold. On the other side, the amount is capped at 4 kg for every individual investor and 20 kg of gold for trusts.
- The maturity tenure for SGBs is eight years, but you are eligible to sell your bonds in the fifth year on an interest payout date.
- They are sold through:
- Stock Holding Corporations of India Limited
- Stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE)
- Commercial banks
- Designated post offices.
- As mentioned above, you can hold your SGB in your Demat account as well as in the form of physical certificates. You also have the option to convert your physical bond certificates into dematerialised bonds.
Sovereign Gold Bonds Strategies: Four Reasons to Invest in SGBs
You could consider implementing a Sovereign Gold Bonds strategy if you’re looking for a safer investment or a physical gold alternative for investment purposes. Here are four reasons why you should invest in SGBs:
- Investing in SGBs can help you with portfolio diversification.
- As an investor in a Sovereign Gold Bond, you earn a fixed interest rate, which presently stands at 2.50%. Conversely, physical gold depends merely on capital appreciation.
- The Government of India safeguards your investments, and investing in SGBs helps to provide protection against inflation, market fluctuations, political upheavals, etc.
- These Sovereign Gold Bonds are considered a better tax-efficient option than physical gold, with zero tax upon redemption. That said, the interest on the bonds is taxable according to your tax slab. Furthermore, if it is sold in the secondary market, you will be liable to capital gains tax at existent rates.
Four Risks You Must Know about SGBs
The following are four key risks/drawbacks you must be aware of if you are investing in SGBs; it will help plan your Sovereign Gold Bonds strategy.
- Gold prices will always be volatile, so the price of your investments may fluctuate as per the gold market prices.
- Therefore, if you have to redeem your bonds before they mature, there’s a chance that you may have to sell them at a lower price than the purchasing price.
- Trading SGBs on exchanges has its benefits, but there is no certainty that there are always investors ready to buy and sell SGBs. If there are no investors willing to purchase your SGB, you will face liquidity issues.
- Lastly, the fixed interest rate offered by SGBs may fail to keep up with inflation rates or changes in interest rates, which could affect your returns in terms of real value.
Conclusion
- The SGB strategy can be a meaningful method to diversify your investment portfolio.
- The SGB strategy acts as a useful inflation hedge and a safe investment that yields fixed income.
- However, understand the key characteristics of the bond before executing SGB strategies.
- At the same time, understand the main risks involved with SGB strategies, which include volatility and interest rate risks.
