Why Invest in Sovereign Gold Bonds?

28 Aug 2021|

1 min read |

by ICICI Securities Team

People have been investing in gold for hundreds of years.

Unlike in the past, investors today have many options when it comes to gold investing, including physical gold (jewellery, bars and coins), gold exchange traded funds (gold ETFs), digital gold and Sovereign Gold Bonds.

Among the options, SGBs offer investors one of the easiest and safest ways to invest in gold.

What are SGBs?

Issued by the government of India, SGBs are tradeable securities that are denominated in grams of gold (of 99.9% purity).

As an individual, you can invest in as little as 1 gram of gold and as much as 4kg. Your investment fetches an interest of 2.5% per annum, payable half-yearly.

SGBs have a maturity period of 8 years with an early exit option after the fifth year. But the advantage of SGBs is that they are traded on the exchanges and you can sell your units like you would sell a share.

SGBs are backed by a sovereign guarantee so there is no credit risk. SGBs attract 0% tax on capital gains if held to maturity.

Why you should invest in SGBs

Gold as an investment has many benefits: it’s a great diversifier, an excellent store of value, a safe haven, highly liquid, a good hedge against inflation and carries no counterparty risk.

Among the many ways to invest in gold, SGB offers many advantages.

Here’s a table comparing the different ways of investing in gold

Comparison of ways to invest in gold

Factors	Physical Gold	Gold ETFs	Sovereign Gold Bonds
Liquidity	High (Sell to jeweller)	Very High (Sell to the mutual fund house or trade it on exchanges)	Very High (tradeable on exchanges; redeemable after 5 years; matures after 8 years)
Returns	Linked to market price (but selling price will usually be lower)	Redeemable at NAV or CMP (which is linked to market price of gold)	Linked to market price + 2.5% interest on investment
Taxation (holding period under 3 years qualifies for STCG; over 3 years is LTCG)	STCG at marginal rate LTCG at 20% with indexation	STCG at marginal rate LTCG at 20% with indexation	No capital gains if redeemed on maturity. If redeemed before maturity, then STCG at marginal rate; LTCG at 20% with indexation
Purity	Not guaranteed (especially if not hallmarked)	Backed by physical gold of 99.5% purity	Not backed by physical gold but tracks price of 99.9% pure gold
Expenses and costs	High making charges (20-35% for jewellery); storage costs and GST	Expense ratio and tracking error	Zero tracking error, low cost
Loan	Allowed as collateral	Allowed as collateral	Allowed as collateral