Sovereign Gold Bonds Schemes – key features, benefits, and risks

Gold has been a popular investment choice for generations. The yellow metal has found its way into every portfolio not just because of its lustre and traditional significance, but also due to its potential to appreciate over time, ease of availability, and relatively less volatility compared with other investment options.

There are several ways in which you can invest in gold. You can either directly buy the metal in the form of a bar or jewellery or invest in gold exchange-traded funds (ETFs), Sovereign Gold Bonds (SGBs), and digital gold.

In this article, we will discuss Sovereign Gold Bonds in detail and tell you why they are among the most efficient ways to invest in gold.

What is the Sovereign Gold Bond scheme?

Sovereign Gold Bond is a scheme sponsored by the Government of India. The scheme was launched in 2015 with the objective to reduce the demand for physical gold. As most of the physical gold in India is imported, it can lead to a trade deficit. The scheme also aimed to monetise the gold held by households in India by offering an investment opportunity that had easy liquidity and fixed interest rates.

How do Sovereign Gold Bonds work?

The Reserve Bank of India (RBI) issues the Sovereign Gold Bonds on behalf of the government.

You can purchase these bonds, denominated in grams of gold, from scheduled commercial banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices and stock exchanges such as BSE and National Stock Exchange of India either directly or through agents.

Any resident individual, Hindu Undivided Family (HUF), trust, university and charitable institution can purchase the Sovereign Gold Bond.

You can purchase a minimum of 1 gram of gold through the Sovereign Gold Bond Scheme at a price that is linked to the price of gold of 999 purity published by the India Bullion and Jewellers Association (IBJA) every day.

SGBs are issued by the RBI in tranches every two to three months. However, there is an upper limit for each kind of investor on how much gold they can buy through the Sovereign Gold Bond Scheme.

Remember, if you purchase gold through SGBs, you will not get actual gold but a certificate in your name that is backed by gold.

Since it is sponsored by the government, there is virtually zero risk of default.

Features of Sovereign Gold Bonds

Investment tenure:

The Sovereign Gold Bond has a maturity period of eight years with an option to exit after the fifth year of investment.

Interest payout:

An investor not just gets the capital gains on Sovereign Gold Bond but also 2.5 percent annual interest unlike physical gold.

Price:

The price of the Sovereign Gold Bond is based on an average of the last three day’s price of 999 purity gold. So, you can be sure that you will be acquiring gold at the most recent price.

Quantity:

There is a minimum and maximum limit of gold you can buy through the Sovereign Gold Bonds Scheme. The minimum permissible investment is 1 gram of gold while the maximum limit of subscription can be 4 kilograms for an individual investor and HUF and 20 kilograms for trusts and similar entities per fiscal year. This limit is inclusive of all tranches.

Tradability:

Unlike bank fixed deposits, Sovereign Gold Bonds can be traded in the secondary market, usually at the prevailing prices. So, you can sell them if you need money before the maturity of the bond.

Advantages of Investing in Sovereign Gold Bonds

There are several advantages of investing in Sovereign Gold Bond that makes it attractive:

Long-term investment:

Sovereign Gold Bonds are good for long-term investments. They promise not just capital appreciation but also an annual interest payment.

Hassle-free:

Since the gold is purchased through a certificate of holding, you are free from the hassle of holding and ensuring the safety of the physical gold. You can also digitise this certificate or simply hold them in their demat account, making it even easier to access them when redeeming or selling in the secondary market.

Good for hedging:

The allure of gold mostly comes from its hedge against inflation and risky events. Usually, gold prices appreciate at a faster rate than the prevailing inflation rate. This means the value of money held in gold bonds does not diminish over time. Gold is also a hedge against risky events such as wars or pandemics when other modes of investments such as equities tend to perform poorly.

Use as collateral:

You can also present Sovereign Gold Bonds as collateral while availing loans from financial institutions. This makes it an ideal for raising money in need.

Low risk:

Sovereign Gold Bonds are relatively low on risks with virtually no default risk. The only risk you need to keep in mind is that your capital may not appreciate over time or just depreciate if the price of gold falls.

Taxation:

You do not need to pay taxes on capital gains generated on investment if you hold them till maturity. However, the semi-annually credited interest payment is considered as income from other sources and attracts taxes as per your income tax rate slab.

Limitations of Gold Bonds

Like the several positives, SGBs also have certain limitations that you need to know about. One big risk is that you may lose your capital if the gold price slides. Also, gold prices and equity prices typically move in opposite directions. So, if your equities perform well during a period, it is quite likely that your gold investment may not appreciate much.

Who should consider investing in Sovereign Gold Bonds?

Investing in Sovereign Gold Bonds can be a good diversification tool. Given its relationship with inflation and equities, Sovereign Gold Bonds can act as a good hedge for risk-taking equity investors. Financial advisors advise allocating a part of your capital, around 10-20 percent typically, in gold. And Sovereign Gold Bonds can be one of the best options to invest in gold.