2 MinsApr 06, 2023
A good investment portfolio should always include an asset class that can provide a hedge against inflation. And gold is one such asset class. Apart from being used as a store of value, gold has proven to be a steady wealth creator. Do you know
it has given 12% annualized returns in the past 20 years1. But investing in physical gold such as jewellery or gold coins has limitations. For instance, you may not get the right value at the time of selling. Additionally, you need to store
it safely. And, it does not earn any money while you hold it, apart from the likely increase in prices. One option to address all these issues is to invest in Sovereign Gold Bonds.
What are Sovereign Gold Bonds?
Sovereign gold bonds (SGBs) are certificates issued by the Reserve Bank of India (RBI) on behalf of the Government of India. To put it simply, they are government securities denominated in grams of gold, which means the value of these bonds is
linked to the price of gold. They also offer a fixed interest rate of 2.5% per annum (p.a.) on the original amount invested. The interest is paid on a semi-annual basis during the tenure of the bonds which is 8 years. Let’s understand
this feature with the below illustration.
Let’s assume you bought 10 units of SGBs having a nominal value of Rs 5,000 each. At 2.5% p.a you will earn an annual income of Rs 1,250 on the total investment of Rs 50,000. Since the Annualized returns as of March 31, 2023 based on the
conversion of LBMA gold prices into rupees (Source: LBMA, RBI) interest is paid out semi-annually, you will receive Rs 625 every six months during the tenure of 8 years. Thus, you will earn an assured income of Rs 10,000 in addition to the
capital appreciation if any.
| Nominal value of bond | Rs 5,000 |
| Total units of bonds purchased | 10 |
| Total initial investment (Rs 5,000 * 10) | Rs 50,000 |
| Interest amount @ 2.5% p.a. (Rs 50,000 * 2.5%) | Rs 1,250 |
| Total interest amount earned in 8 years (Rs 1,250 * 8) | Rs 10,000 |
The dual benefits of assured returns and likely capital appreciation have made Sovereign Gold Bonds popular amongst investors. The government issues fresh tranches of Sovereign Gold Bonds several times a year. In this blog, we outline the
benefits and limitations of Sovereign Gold Bonds, and whether you should invest in them.
Also Read: [How valuable is your Sovereign Gold Bonds investment?]
What are their benefits?
- SGBs are a secure investment. They are certificates governed by the Government Security Act of 2006 and are backed by gold investment.
- SGBs offer interest on the original amount invested. It is currently 2.5% per annum, which is paid out bi-annually.
- You are exempt from paying capital gains tax upon redemption after a maturity period of 8 years.
- It is convenient to purchase SGBs. You can buy them online and receive a digitized certificate with all details. You do not have to worry about the storage and maintenance of physical gold. Besides, you also get a discount of Rs 50 if
you purchase SGBs online.
- SGBs offer likely capital appreciation, based on changes in gold price. Gold price usually tends to rise when the price of equities falls. This makes gold a useful tool for portfolio diversification.
- Gold is also considered a hedge against inflation, provided you invest for the long term. SGBs are ideal for those having a long-term horizon for investments. The maturity tenure is 8 years, and the capital gains are tax-free if you hold on
to them till maturity.
- You also have an option of premature redemption after the 5th year on every interest payout date. In case of premature withdrawal, your long term capital gains will be taxed at 20% after availing indexation benefit. This effectively lowers
your tax impact because your gains are taxed after taking into account the effect of inflation on your bonds.
- SGBs are an acceptable form of collateral if you are looking to avail of loans.
- SGBs are also tradable on exchanges if held in demat. They are also transferable in accordance with provisions of the Government Securities
Act.
- There is no GST when you buy SGBs, making it even more attractive to investors.
What are their limitations?
- Gold investments are subject to price risk and the same applies to SGBs. When the stock markets are on an upturn, the price of gold may reduce, which can impact the value of your SGBs. At such a time, the demand for gold bonds reduces,
which may also trigger a drop in value.
- You can invest in SBGs only when a fresh tranche is announced. This may be a limitation since you will have to keep track of the dates of the tranche and ensure that funds are available for investing during that period.
- The long lock-in period of 8 years may seem like a drawback. But remember, gold as an investment, should be ideally held for the long term to get meaningful capital appreciation.
Should you invest in Sovereign Gold Bonds?
Investment in any asset must be seen in context to the entire investment portfolio strategy, as opposed to as an individual activity. You should dedicate at least 5-10% of your overall portfolio towards gold to build resilience and security. Sovereign
gold bonds score well among virtual gold assets because they are backed by the Government of India.
Summing up
If you want to start investing in gold, consider investing in sovereign gold bonds via Axis Bank’s internet and mobile banking platforms. You can invest in sovereign gold bonds of a minimum of 1 gram to a maximum of 4 kg in a fiscal
year, from the comfort of your home. So, keep an eye out for the next upcoming tranche and start diversifying your portfolio with sovereign gold bonds.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
