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Why Invest in Sovereign Gold Bonds?

28 Aug 2021 0 COMMENT

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

Advantages of SGBs!

  • Sovereign Gold Bonds are a cost-effective way of investing in gold
  • No making charges (20-30% of jewellery cost)
  • No security, storage risks as in physical gold
  • Gold ETFs have a higher expense ratio and tracking error
  • Tax efficient: No long-term capital gains tax, if redeemed on maturity
  • SGB’s provide a half yearly interest payout at the rate of 2.5% p.a.
  • Sovereign-backed so zero credit risk
  • Tradeable in the exchanges

Ready to go for gold? Then look no further than SGBs.

Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. AMFI Regn. No.: ARN-0845. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism.  The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.