Is Sovereign Gold Bond Good Investment?

SGBs, also known as Sovereign Gold Bonds are backed by the government of India. Rather than buying the gold physically and then selling it at the current market value in order to liquidate it, SGB offers a clean alternative without the hassle. These bonds offer an investment opportunity, allowing you to participate in the movements of gold prices without actually owning the metal physically. In this article, we will discuss the advantages of investing in Sovereign Gold Bonds and let you understand the traits of this investment thereby helping you make an informed decision regarding the inclusion of SGB in your investment portfolio. 

Cost-Effective Gold Investment

If you compare holding physical gold, investing in Sovereign Gold Bonds is very much cost-effective. Consider purchasing and selling jewelry. You will incur significant losses in terms of design and making charges which can sometimes amount to between 15 and 20% of the gold’s value each time you convert it. Even if you opt for gold bars or coins, these physical forms aren’t free from the challenges of owning them. Storage, insurance, and safety are crucial variables that you need to take complete responsibility for. SGBs provide a convenient alternative, as they can be held in the form of physical certificates or in your demat account.

Some investors may consider gold Exchange-Traded Funds (ETFs) held in demat form, but these come with transaction costs each time you transact with the market. This shouldn’t be an issue if you are holding it for the long term. But if you are unsure about picking this as a long-form investment, this is of some concern to you. Additionally, the annual Asset Management Company (AMC) cost of 1% is deducted from the Net Asset Value (NAV) of your gold ETF. Whereas the Sovereign Gold Bonds are typically issued by the government at a discount to the average market price, offering a cost advantage.

Earn Annual Interest on Your Gold Holdings

SGBs also provide investors with a payout of the annual interest. While holding gold in physical or ETF form offers no means of income, SGBs offer an annual interest rate of 2.50%. It is notable that this rate has decreased from the previous 2.75%. But, it still serves as a valuable way to utilize your idle gold. The interest payment serves as partial compensation for inflation risk. This also provides stability to your overall returns as the payout is regularized annually. Since SGBs fall under the bonds financial instrument, this means that SGBs are certified by the government of India. This means that these are highly reliable and long-term bonds will be very valuable as an investment, moreover, these are extremely safe. For investors who do not like to absorb more risk and play their investments safe, this virtually risk-free investment vehicle seems like an apt strategy.

Tax Efficiency

Sovereign Gold Bonds offer another advantage in terms of tax efficiency when compared to physical gold investments. Understanding the capital gains tax aspect of SGBs is essential. Gold is categorized as a non-financial asset, and capital gains are determined by the holding period. If you sell your gold within three years, you are liable for short-term capital gains tax at your applicable income tax rate. Selling after a three-year period classifies the gains as long-term capital gains, which can be taxed either at 10% without indexation benefit or at 20% with indexation benefit.

In contrast, the redemption of Sovereign Gold Bonds after a holding period of 5 years (the bonds have a tenure of 8 years) is entirely tax-free in the hands of the investor. However, if you decide to sell SGBs in the secondary market, they will attract capital gains tax at the prevailing rates. Interest earned on SGBs is taxed like regular interest income at your applicable tax rate. 

If you are a believer in Gold and like to stay invested in it, owning physical gold is not the way anymore. With real tax incentives for long-term SGB holders, the means of owning gold have changed drastically. 

Decision 101: Should You Invest in Sovereign Gold Bonds?

Before making a decision to invest in Sovereign Gold Bonds, consider these three key points:

1. Efficient Gold Holding

Sovereign Gold Bonds provide an efficient, productive, and economical way to hold gold. Not only do they offer an opportunity for earning interest, but they also come with the added benefit of a sovereign guarantee, making your investment virtually risk-free.

2. Gold as a Safe-Haven

Gold tends to outperform other asset classes during times of economic uncertainty, geopolitical instability, or currency devaluation. Given the current global economic landscape, with events unfolding in regions like Syria, Afghanistan, North Korea, and Europe, gold remains a preferred safe-haven investment. Investors should really consider this aspect when making their investment choices.

3. Portfolio Diversification

Lastly, any decision to invest in gold should align with your overall portfolio strategy and long-term goals. While an allocation of 8-12% in gold can provide a safety net during uncertain times, it’s crucial to recognize that, unlike the equity market, gold doesn’t generate long-term wealth. Regardless of how the world values gold, your strategy depends on your portfolio allocation. When the world is under uncertain times, with worries about global hyperinflation fears, gold is what all investors adore the most. This means, having the right exposure to gold acts as a cushion during market collapse. 

Wrap Up

Sovereign Gold Bonds present a compelling investment opportunity with several advantages, including cost-efficiency, interest income, and tax benefits. As you contemplate your investment choices, evaluate your financial objectives and risk tolerance to determine if Sovereign Gold Bonds align with your investment strategy. Given their unique features and government backing, they will definitely help in diversifying your investment portfolio.