The reverence Indians have for gold is beyond its market value. In an Indian household, many prefer to buy it physically and store it. In the long run, gold is regarded as the safest investment option, and it will help families get through financially difficult times, as one can easily liquidate this asset class. Physical gold assets can be purchased from local or international jewellery stores or online stores. There is no broker involved or any limit to buying the gold, and there is a minimal risk.

However, as the generations shift over time, many individuals have become more aware and interested in better modes of investment. There are now several alternatives to possess gold without its inherent risks, such as storage risk or bearing making and wastage charges. It includes investments in gold via mutual funds, i.e. Gold ETFs and Gold Savings Fund.

Given that, if you invest in gold coins and bars, you’re squandering a golden opportunity to generate significant returns. There are gold bonds in the market that allow you to profit from price fluctuations in gold while still paying a fixed interest rate, similar to bank fixed deposits. A sovereign gold bond is a low-cost, high-quality, simple but superior alternative to buying physical gold offered by the Government of India and RBI.

Here, you can own gold in a ‘certificate’ format. The sovereign gold bond seems like the 2.0 version of physical gold, and it is a better investment option than purchasing physical gold that carries the risk of theft.

Here’s all you need to know about Sovereign Gold Bonds (SGBs):

What are Sovereign Gold Bonds?

Sovereign Gold Bonds, or SBGs, are gold bonds issued by the Reserve Bank of India (RBI) on behalf of the Government of India. In November 2015, the Indian government launched the Sovereign Gold Bond (SGB) Scheme to provide investors with an alternative to physical gold. In simple words, Sovereign Gold Bonds (SGBs) are debt securities that look like paper-based certificates that are issued by the RBI.

A Sovereign Gold Bond is denominated in grams of gold. The gold in this bond is sold on a unit-by-unit basis, with each unit’s value deriving from the underlying one gram gold with 999 purity. You can buy in multiples of 1 gram (gm). As a result, the minimum investment is 1 gram, and the maximum gold that can be purchased through gold bonds is 4 kgs per investor per financial year.

The price is established by averaging the closing gold prices for the latest three working days preceding the subscription period. The India Bullion and Jewellers Association Limited publishes these closing prices (IBJAL). The same source also calculates the redemption price from the latest base data.

SGBs are easy to buy and manage as compared to physical gold, with a tenure of 8 years, and one can use the exit option after 5 years. If you want to exit before the maturity date, you’ll need to conduct an early redemption and notify the bank. SGBs offer investors an interest rate of 2.5% per annum paid on a half-yearly basis. Individual purchases in these SGBs are restricted to a maximum of 4kgs per financial year, and in case of a trust, it is restricted to 20kgs.

The RBI issues Sovereign Gold Bonds in different tranches during the financial year, and these bonds are made available via banks, brokers, post offices, and online platforms. To encourage investors to acquire SGBs online, a discount of INR 50 per gram is granted to those investors who opt to purchase digitally. Notably, RBI releases a fresh series of SGBs for sale in the market, on a regular basis. In case, you missed the most recent one, you can always wait for the next one to be released.

The SGBs can be purchased in physical, digital, or dematerialized forms. By making a special request, investors can have these bonds credited to their Demat accounts once they have been purchased physically. The RBI subsequently processes the dematerialization; until then, the bonds are held in RBI’s books. The only document mandatory for the purchase of SGBs is a PAN card, without which no investment in these bonds is permitted.

Moreover, gold-bond holders can sell their SGBs on stock exchanges at any moment. Please keep in mind that if the bonds are sold via the exchange platform, the applicable capital gains tax will be payable at the same rate as for physical gold.

Advantages of investing in Sovereign Gold Bonds:

You may consider diversifying your portfolio with at least 5%-10% in gold as an asset class. It is perfect for investors with a low to medium risk appetite as a low-risk investment. Compared to physical gold, the cost to purchase or sell SGBs is quite low.

  • SGBs ensure the quality of gold is protected (i.e. 999 purity), and investors are secured against the inherent risks involved. (i.e., theft, storage, and high-making charges.)
  • There is no expense of owning or storing gold bonds (paying for storage charges of bank lockers), as these bonds are digital and kept in the investor’s Demat account.
  • When you apply for gold bonds online, you can get it at a lesser price as compared to physical gold. These bonds carry a sovereign guarantee, as they are backed by the government.
  • A major benefit the sovereign gold bond scheme provides is a fixed interest rate. The 2.5% interest makes this option attractive. Unlike physical gold, investors earn a passive income on their gold, which is directly credited to the bondholders’ accounts.
  • The capital gain on the maturity or redemption amount of these bonds is completely tax-exempt, making them attractive for long-term investors. Do keep in mind that the interest earned on Sovereign Gold Bonds is taxable as per the provisions of the IT Act, 1961.
  • For non-individual investors, there is also an indexation benefit if the money is transferred before maturity. There is no TDS during redemption or interest distribution, which is a relief.
  • Last but not least, a sovereign gold bond is extremely liquid. This is due to the fact that you can sell the SGBs, or the investment can be used as a form of collateral for loans.

The Reserve Bank of India (RBI), on behalf of the Government of India, has issued the tenth tranche of Sovereign Gold Scheme 2021-22. The Sovereign Gold Bond (SGB) Scheme 2021-22 – Series X will open for subscription on February 28, 2022, i.e., Monday, and it will be available for the next five days until Friday, March 4, 2022.

The Reserve Bank of India (RBI) on last Friday fixed the issue price at Rs 5,109 per gram. In consultation with the central bank, the Government of India has decided to offer a discount of Rs 50 per gram on the nominal value to those investors who will apply online, and the payment against their application is made through digital mode. For such investors, the issue price of Gold Bond will be Rs 5,059 (Rupees Five thousand and fifty-nine only) per gram of gold, the RBI said in its statement.

The bonds will be sold through banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices, and recognised stock exchanges such as the National Stock Exchange of India Limited (NSE) and Bombay Stock Exchange Limited (BSE).

Should you invest?

Sovereign Gold bonds are available for purchase by all residents, HUFs, registered entities such as trusts, universities, charity institutions, societies and clubs, partnership firms, and private or public limited enterprises. Non-Resident Indians (NRIs) and foreign institutions/entities, on the other hand, will not be permitted to own gold bonds.

In comparison to physical gold, the cost of purchasing or selling the SGB is also minimal. SGBs are a good option for those investors who do not want to deal with the hassles of storing physical gold. This is because it is simple to store in Demat form, and there is no risk of theft as it is in electronic form.

Although SGBs offer investors decent market-linked returns and several benefits compared to physical gold, it is not immune to risks. There is a risk of loss if the market price of gold falls below its cost price.

In recent months, demand for sovereign gold bonds has picked up the pace due to its rising ‘Safe Haven’ appeal. However, investors may remain cautious due to a lack of clarity on how gold will move in the coming months due to the looming threat of the Omicron variant, RBI’s stance of monetary policy normalization amidst the inflationary pressures, and the recent geopolitical tensions between Russia-Ukraine with a surge in crude oil prices that may pose a risk to the economic growth. These factors, among others, may influence the price fluctuations of gold, one of the precious metals in the bullion market. The bullion market is expected to remain volatile in the near term.

Therefore, before investing in the Sovereign Gold Bond Scheme, you must assess your risk profile and suitability to the bond’s duration and ensure that your investment objective is aligned with the scheme.

This article first appeared on PersonalFN here

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