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What is a Sovereign Gold Bond?

18 Aug 2022 0 COMMENT

Introduction

For Indians, gold has been a valuable investment since time immemorial. There are concrete reasons to invest in gold. From accumulating jewellery to gold bars, Indian households are drawn to the yellow metal for its security, appreciation opportunities, and social value. Given its demand in the country, the Government of India launched a Sovereign Gold Bond (SGB) scheme in 2015. Since then, it has been issuing the bond in tranches for people to subscribe to it.

What are Sovereign Gold Bonds?

A sovereign gold bond is a government-backed bond. It is a way to invest in gold without actually owning gold physically. It is issued as a paperback or a digital gold bond certificate. SGBs are issued in tranches by the Reserve Bank of India on behalf of the government.

SGB investment is priced based on the average closing price of 999 purity of gold, as published by the India Bullion and Jewellers Association Limited for the previous three working days before the subscription period. The bonds are denominated in multiples of 1 gram of gold. SGBs have a maturity period of eight years, although you can sell them on the bonds exchange after five years.

Why Invest in Sovereign Gold Bonds?

SGBs are government-backed instruments that can help you hold gold without the hassles and risk of physical gold. There are many reasons to invest in sovereign gold bonds. Some of the reasons why one should invest in sovereign gold bonds are as follows:

1. Safe investments: Sovereign gold bonds are guaranteed by the government of India, so they are safe investments. Additionally, since you do not have to hold the gold in physical form, you are protected from theft, paying locker charges to store your gold and any other risks that come with holding gold in its physical form.

2. Stable returns: SGBs provide the advantage of returns at maturity plus a regular interest component. The latest tranche of the SGB scheme has been issued at an annual interest rate of 2.5%, to be paid semi-annually. You will also get the current price of gold of the bond’s value upon maturity. In most cases, gold bonds are issued by the government at a discount on the average market price of gold.

3. Tax-efficient: Upon maturity of the bond, there are no capital gains charged on the gains. If the bond is redeemed after five years, you get an indexation benefit. Also, the interest received on the bond does not have tax deducted at the source.

4. Low minimum investment: You can invest in as little as one gram of gold under the SGB scheme. This is an affordable way of investing in gold if you want it in your portfolio.

5. Collateral: SGB certificates can also be used as collateral to get loans from banks.

Additional read: Is Sovereign Gold Bond (SGB) a good investment option

Should You Invest in Sovereign Gold Bonds?

In many ways, SGBs are new-age investment instruments for those who want to do away with the disadvantages of holding physical gold. Additionally, they provide regular returns and enjoy a sovereign guarantee. SGBs may be a good investment choice if you want to diversify your portfolio, don’t want to hold physical gold, and don’t mind waiting eight years until maturity. 

While there are many reasons to invest in sovereign gold bonds, if you are accumulating gold for a specific reason, such as your child’s marriage or to use gold jewellery at festivals, it is better to opt for physical gold. If you think you may have to sell your SGB within eight years to fulfil any of your needs, you need to consider that SGB secondary market sales will attract tax. 

If you are looking at simply investing in gold for diversification benefits and as a hedge against inflation, then, as mentioned, there are numerous benefits to investing in sovereign gold bonds.

Conclusion

Now that you know about sovereign gold bonds and the reasons to invest in sovereign gold bonds, you can purchase the RBI’s latest tranche of sovereign gold bonds on ICICIdirect.

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