SGBs, or sovereign gold bonds, are gold bonds issued by the Reserve Bank of India on behalf of the Indian government (RBI). This bond’s gold is sold by the unit, with each unit’s value derived from the underlying one gram of 999 purity gold.
The price is calculated by averaging the three working days prior to the subscription period’s closing gold prices. These closing prices are published by the India Bullion and Jewellers Association Limited (IBJAL). The redemption price is based on the most recent base data from the same source.
SGBs are easy to obtain and maintain, with a term of eight years and a half-yearly interest rate of 2.5%. Every financial year, individual purchases are limited to 4 kilogrammes, while trust purchases are limited to 20 kilogrammes. The only document necessary to acquire SGBs is a PAN card; without it, no investing in these bonds is possible.
How do Sovereign Gold Bonds work?
Throughout the fiscal year, the RBI issues SGBs in several tranches. Banks, brokers, post offices, and internet platforms are used to sell these assets. To encourage investors to buy SGBs digitally, a discount of INR 50 per gramme is granted to them.
It’s worth noting that the RBI releases fresh series of SGBs for sale in the market on a regular basis. So, if you missed the most recent one, there’s always the next one to look forward to.
The bonds are available in three different formats: tangible, digital, and dematerialized. Investors can have these bonds credited to their demat accounts once they have been physically obtained by making a particular request. RBI processes the dematerialization after then, and the bonds are kept in RBI’s archives until then.
Dematerialization is also possible after allocation. Those who do not want to buy directly from the RBI can do so in the secondary market, which includes stock exchanges.
What are the benefits of investing in Sovereign Gold Bonds?
SGB is an excellent option for people looking to buy gold only for financial purposes. SGBs ensure that gold’s purity is maintained and that investors are protected from risk. Because these bonds are digital and kept in an investor’s demat account, they can save money by not having to keep physical gold.
The 2.5% interest makes this alternative enticing since investors receive a passive income on their gold, which is directly credited to bondholders’ accounts. These bonds are great for gifting in the stock market.
Long-term investors will be attracted to these bonds since the capital gain on the maturity amount is tax-free.
Before acquiring SGBs, either during the issue period or on the stock market, be sure you understand the benefits and downsides of doing so. If you want to invest in SGB, you can get a better price if you buy it on the stock market.
Remember that including gold as an asset class in your portfolio using SGBs is a great approach to diversify your portfolio. However, make sure you know everything there is to know about them before you buy.
Another advantage of acquiring SGBs is that they may be used as collateral for loans. When banks accept SGBs as collateral, they not only lower the total cost of borrowing but also act as an incentive for consumers who would otherwise acquire gold as a safety net in case of a financial emergency.
Because the loan-to-value (LTV) ratio is the same as for typical gold loans, investors are less concerned about the product’s impending liquidation. Furthermore, unlike fixed-rate loans, the SGB’s interest is not held by the institution that holds it; instead, it is repaid to the intended beneficiary.
Investors can invest in e-gold and gold exchange-traded funds in addition to physical gold (ETFs). While each has its own set of advantages and disadvantages, the yearly interest rate of 2.5 percent paid to investors every six months sets gold bonds apart from the rest.
As a result, you benefit from both long-term price appreciation and short-term interest gains. Liquidity may be a problem if you want to exit before the fifth year by selling the units on stock markets. On a date determined by the RBI, bonds become tradable on stock exchanges a fortnight after they are issued.
What are the drawbacks of investing in Sovereign Gold Bonds?
There is a risk of loss if the market price of gold falls below its cost price. This is not a risk specific to SGB gold investments, but it does apply to all types of gold investments. The RBI, on the other hand, ensures that the investor will never lose the gold that they have been given.
SGBs are designed to make gold investing more convenient. When it matures, it also provides tax benefits, but it is not meant for trading. As a result, the majority of people who buy these bonds do so as part of a long-term investing plan. SBG’s low stock market trading volume also demonstrates this.
Are Sovereign Gold Bonds a good investment?
Taxation is something that an investor should properly understand before investing in SGB. The Indian government introduced SGBs to make gold investment easier. It offers a one-of-a-kind tax benefit.
Under the SGB structure, the bond has an eight-year maturity. The capital gain on the maturity amount is tax-free, but any sales made before the maturity date are subject to capital gain taxes based on the holding period.
It’s worth noting that the tax break extends to bonds purchased on secondary marketplaces like stock exchanges. When you buy SGB on a stock market, the transaction is seen as a transfer rather than redemption, and as a consequence, you become the bondholder and get a tax-free payment when the bond matures.
However, if you sell a bond on the stock market before it matures, the profit will be liable to capital gains tax. These short-term benefits will be applied to your taxable income and taxed at your marginal rate.
If the profit is held for more than three years, it is termed a long-term capital gain or LTCG. With indexation advantages, these benefits are taxed at a rate of 20%; without them, they are taxed at a rate of 10%.
These bonds have a yearly interest rate of 2.5%. It is paid on a six-monthly basis. There is no tax deducted at source (TDS) on this interest payment. It’s added to your taxable income and taxed in accordance with your tax bracket.
Make sure the market is liquid before you buy. The stock market is only influenced by supply and demand. As a result, evaluate the liquidity of the series you’re buying before buying SGB on the market. You won’t be able to get a good bargain on that series if there is a lot of demand for it. However, if you wish to buy and sell your bond on the stock exchange, look for a group of bonds with high liquidity.
Gold tends to outperform other asset classes when there is economic instability, geopolitical uncertainty, or a decrease in the value of fiat currencies. In the global economy, we may see signs of all three at the present.
Take a look at the political turbulence in Syria, Afghanistan, North Korea, and Europe. In these uncertain times, gold is viewed as a safe-haven investment, and as a result, there is a lot of demand for it. This is something to keep in mind as an investor.
Finally, every decision to invest in gold should be weighed against your overall portfolio mix and long-term goals. A gold exposure of 8-12 percent in your portfolio is frequently suggested as a safety net for your portfolio in times of uncertainty. Gold, unlike stocks, does not, however, provide long-term wealth. That should be the guiding idea in your gold investment decisions.
Despite the fact that gold’s attraction as an inflation hedge appears to be fading in recent months as investors flock to cryptocurrencies, many financial experts urge investors to stick with the good old yellow metal. Gold prices rise during periods of economic turmoil.
When the element of uncertainty is eliminated from the equation, the price of gold loses its buoyancy. The second factor that might drive up gold prices is inflation. When the cost of goods grows, so does money’s purchasing power. Gold is seen as a valuable asset that may be utilized as a hedge against inflation.
Gold should be a component of everyone’s portfolio since it acts as an inflation hedge and offers liquidity during times of political and economic turmoil. Gold is offered at all conceivable social occasions in India, especially at the time of sons and daughters’ nuptials.
As a result, one should continue to invest in gold so that adequate money is available when the family marries. Because your investment in gold through SGB pays you income and the capital gains at redemption are tax-free, you should invest in these bonds to protect yourself against inflation and diversify your portfolio.