Is Sovereign Gold Bond (SGB) a good investment option?

March 04, 2019

sovereign-gold-bond-investment-option

It is traditionally believed that investments made in gold never fails. But your investments in physical gold come with a few drawbacks. For instance, you’re required to pay high making charges for gold jewellery and also need to arrange for its safe storage. Both these reasons can considerably affect your returns.

Is there a better alternative to invest in gold for portfolio diversification? Yes, the government’s Sovereign Gold Bond (SGB) eliminates these common drawbacks while also allowing you to enjoy the benefits of investing in the precious metal. Let us have a look at 5 reasons that make this gold investment scheme an excellent investment option-

1. Fixed Interest Rate

SGB allows you to buy gold in digital or paper format. This means by investing in this scheme, you’ll not receive physical gold but gold bond. One of the biggest benefits of this bond is the fixed annual interest it earns.

Irrespective of the ups and downs in the gold prices, you’ll receive guaranteed annual interest fixed by the RBI. The current rate of interest on SGB is 2.5% which is divided into two 6-monthly payments. This makes gold bonds more rewarding as you do not earn any interest when you invest in physical gold.

2. Long-Term investment

The maturity for investment in gold bonds is 8 years but you can exit after 5 years too. If you are an experienced investor, you might already understand how longer lock-in periods help you become a disciplined investor and enable you to achieve your investment objectives.

With your money locked in for at least 5 years, SGB is one of the best investment options for investors aiming for long-term capital growth.

3. Easy tradability

Unlike many different forms of investment which face a liquidity problem, gold bonds are highly liquid. You can easily trade them on stock exchanges but within a particular duration at the issuer's discretion.

For instance, if you’ve invested in SGB 5 years ago, you can sell the same at exchanges such as NSE or BSE. But note that if you are holding the bonds in large quantities, it might not be possible to have a ready buyer for such quantities.

4. Cost-Efficient

Investment in Sovereign Gold Bond is also more cost-efficient as compared to investing in physical gold or other gold products like gold ETFs. For physical gold, there is generally a making charge which can be at least 10% of the value of the gold. Similarly, with gold ETFs, there is a 1% expense ratio.

However, there are no such charges involved in SGB. Also, with SGB, you can purchase as little as 1 gram of gold.

5. Taxation benefit

No Tax Deducted at Source or TDS is applicable on the interest you earn from SGB. You can also get the indexation benefit if the SGB is transferred before the maturity period. Redemption after maturity is exempt from capital gains tax.

However, if you decide to sell the bond on exchanges after the 5 year lock-in period, you’ll be required to pay taxes on the gains or losses.

Investing in SGB

If you are aiming for portfolio diversification, Sovereign Gold Bond is one of the most affordable and reliable investment options. But how to Invest in gold bonds? The easiest way to invest in SGB is through the designated banks. However, you cannot invest in SGB throughout the year.

The RBI comes out with the primary issue of various tranches of the gold bond for open purchase. This generally happens every 2-3 months. Once a new issue is launched, you can visit the official website of a designated bank to invest in the gold bond online.

 

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