Sovereign Gold Bond (SGB) offers a secure way to invest in gold without holding it physically. Before investing, investors should know and understand both the benefits and limitations of this government security. In this page, you’ll learn the key advantages and disadvantages of SGBs, important factors to consider before investing in them and whether you should invest in them or not.
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What Are Sovereign Gold Bonds?
Sovereign Gold Bonds (SGBs) were introduced in November 2015 as part of the Gold Monetisation Scheme. They are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. These bonds allow investors to invest in gold digitally in a more convenient and cost-effective manner than holding physical gold.
Advantages of Investing in Sovereign Gold Bonds
The benefits of investing in Sovereign Gold Bond scheme are as follows:
- Earn fixed and regular interest income
Investors holding Sovereign Gold Bonds receive fixed interest payments at 2.5% p.a. at regular intervals of six months. The interest amount is calculated on the initial issue price of the bond. This is an exclusive benefit, which means that it is not available on any alternative gold investment instrument like physical gold, digital gold, gold ETFs and gold mutual funds.
- Bear no storage expenses
When buying or holding Sovereign Gold Bonds, investors don’t have to pay any storage costs. Whereas, when buying physical gold or even holding gold ETFs or e-gold, investors must pay additional costs such as making charges, bank locker charges, etc.
- Enjoy transparent pricing
The issue and redemption price of Sovereign Gold Bond is linked to the prevailing gold market price, as published by the India Bullion and Jewellers Association Limited (IBJA), ensuring transparent pricing. However, if you are planning to purchase or sell Sovereign Gold Bonds through the secondary market, then the price available there might be at discount or premium to the gold market price published by the IBJA.
- Use it as collateral for loans
Sovereign Gold Bond can also be pledged as collateral for availing loans from banks and NBFCs. The regulatory cap on gold loan LTV ratios put by the RBI applies to loans availed against SGBs as well.
- Pay no capital gains tax on holding the bonds till maturity
Holding Sovereign Gold Bonds till their maturity dates exempt their investors from incurring capital gains. This benefit allows SGB to generate superior post-tax returns when compared to alternative investment instruments like gold funds, physical gold, gold ETF or digital gold.
- Earn potential gains
The market price of Sovereign Gold Bonds changes as per the changes in market price of physical gold. This allows investors the potential to book capital gains on maturity or early redemption.
Disadvantages of Investing Sovereign Gold Bond Scheme
Like any other investment option, Sovereign Gold Bonds also comes with its own share of disadvantages. Those interested in SGB should know of these disadvantages to make more informed decisions.
- Conditional premature redemption
Investors holding Sovereign Gold Bonds can choose to sell it before their bond’s maturity date but only after completing 5 years and only on specific dates. This reduces liquidity for the bondholders. However, investors holding Sovereign Gold Bonds in the demat form can sell them in the secondary market subject to their trading volume and purchase bids available in the market.
- Gold price risk
Sovereign Gold Bond comes with price risk as it is linked to gold prices. As gold prices can be very volatile at times, any fall in the market price of gold will lead to a reduction in the market value of your SGB holdings.
Factors to Consider While Investing in Sovereign Gold Bond Scheme
Even though the government has discontinued new issuances of Sovereign Gold Bonds, investors can still buy and sell these bonds through the secondary market. However, before investing in Sovereign Gold Bonds through secondary market, investors should consider these points:
Liquidity: Compared to most other digital gold investment options such as gold mutual funds, gold ETFs, etc. Sovereign Gold Bonds usually have low trading volumes, which means it might be difficult for investors to buy or sell Sovereign Gold Bonds quickly and that too at desired prices.
Price difference with other gold instruments: When buying Sovereign Gold Bonds from the secondary markets, the price available there might be at discount or premium to the market price of gold as published by the IBJA due to various demand and supply factors in the secondary market. Therefore, check whether the market price of SGB in the secondary market is at a premium or discount to other gold investment alternatives like gold ETFs, digital gold and gold funds.
Minimum investment amount: To invest in Sovereign Gold Bonds, investors must buy at least 1 unit, which is equivalent to 1 gram of gold. The cost of this can be quite high for some investors as it is linked to the current market price of the gold. Thus, for investors preferring to start investing in gold with a smaller amount, Gold Fund of Funds can be a better option, as it allows you to invest in gold in smaller amounts, both through lumpsum and SIP route.
Price Variation in SGB tranches: The prices of Sovereign Gold Bonds available in the secondary market may vary across tranches based on their residual tenure. Therefore, before investing, investors must compare the market prices of various SGB tranches after factoring their investment horizon.
Conclusion – Should You Invest in Sovereign Gold Bonds?
Investors should ideally allocate at least 5-10% of their investment portfolio to gold as it acts as a hedge against market volatility, geopolitical risks, etc. Among various ways to invest in gold, Sovereign Gold Bond comes across as a cost-effective and efficient option. It provides semi-annual fixed interest payments at 2.5% p.a. – a feature that no other gold investment option (like gold ETF, physical gold, digital gold and gold funds) offers. Holding SGB till maturity also exempt capital gains, if any, from LTCG/STCG tax. Additionally, investors can use SGBs as collateral to avail loans from various banks and NBFCs.
Sovereign Gold Bonds are a cheap and effective way to invest in gold. It offers fixed interest payments semi-annually at an interest rate of 2.5% p.a. Holding them till maturity will exempt their capital gains, if any, from taxation. Investors can also use it as collateral to avail loans against it from various banks and NBFCs. Moreover, it hedges against the risks associated with more volatile assets of your investment portfolio.
FAQs
Is investing in Sovereign Gold Bonds safe?
Sovereign Gold Bond is a special type of government bond, which the RBI issues on behalf of the Government of India. For investors, there are no worries related to storage or purity issues.
Are gains from SGBs taxable?
Capital gains from Sovereign Gold Bonds are tax-free, provided the investor holds it till maturity. The interest earned on SGBs is taxed as per the investor’s income tax slab rate. If SGBs are sold within one year, the gains are treated as short-term capital gains and are taxed as per the investor’s tax slab rate. Gains from SGBs held for more than a year but before maturity are considered long-term and taxed at 12.5%.
Can I sell SGBs before 8 years?
Investors can sell SGBs anytime in the secondary market. and can redeem them on specific dates after completing the 5th year of its tenure.
Which is better FD or Sovereign Gold Bond?
Fixed Deposit are suitable for investors seeking maximum capital protection and income certainty. On the other hand, Sovereign Gold Bonds work well for hedging the portfolio against geopolitical risks and market volatility. Ideally, investors should include both FDs and SGBs in their investment portfolio for better stability and long-term risk protection.