Are Sovereign Gold Bonds Worth The Investment Risk?

With the price of gold increasing rapidly, it has quickly become a precious commodity. To obtain funds, many people sell pure gold coins and jewellery. Some often also apply for a gold loan. However, you can now invest in a Sovereign Gold Bond, which has far more advantages than physical gold. In simple terms, it is a convenient way to invest in gold. 

But, what are Sovereign Bonds? And who issues them?  

A Sovereign Gold Bond, or SGB, is a Gold Bond or government security. The Reserve Bank of India issues it on behalf of the Government of India. The RBI also counts SGBs in grams of gold. Thus, it acts as a substitute for physical gold. As an investor, you must also pay the issue price in cash when you invest in SGBs. Upon maturity, you will be able to redeem the bonds in cash as well. You can buy these bonds from the following organisations and entities:

• Nationalised Banks
• Select Post Offices
• Scheduled Private and Foreign Banks
• Authorised Stock Exchanges
• Stock Holding Corporation of India LTD. (SHCIL)

Who can invest in a Sovereign Gold Bond?

If you are an Indian resident, as per the 1999 Foreign Exchange Management Act, you can invest in SGBs. Others who are eligible in invest in Sovereign Bonds include charitable organisations, trusts, universities, as well as HUFs (Hindu Undivided Family), and individuals. Additionally, you can also be an individual investor who has changed your residential status. If you have become a non-resident from a resident, you can continue to hold SGBs till early maturity. 

What are the significant features and characteristics of the Sovereign Gold Bond?

There are several features of Sovereign Bonds which make them a far superior replacement of physical gold.

• Eligibility: Any resident of India can invest in SGBs, including trusts, HUFs, universities as well as charities. You can also invest in SGB on behalf of a minor. 
• Tenure: The tenure or maturity period of Sovereign Gold Bonds is 8 years. However, you can choose to apply for early redemption or maturity from the fifth year onward. 
• Value: The Reserve Bank of India calculates the value of Sovereign Gold Bonds in grams of gold. The basic unit of this calculation is 1 gram. The minimum initial investment for SGB is 1 gram of gold. The maximum limit for an individual or HUF investor is 4 kilograms of gold. Trusts and universities can purchase a maximum limit of 20 kilograms of gold. 
• Interest rates: The current rate of interest for SGB is 2.50% per annum on the initial investment. Investors must pay the interest twice every year. The returns that you can get on Sovereign Bonds vary according to the current price of gold in the market. 
• Issuance of bonds: Only the Reserve Bank of India can issue a Sovereign Gold Bond on behalf of the Government of India. You can also trade sovereign bonds on the stock exchange. The RBI issues the bonds in multiples of 1 gram of gold. It also gives the investors a holding certificate for the same, which can be converted into a Demat form. This way, the risk of any loss becomes quite low.  

What are the advantages of investing in a Sovereign Gold Bond as compared to physical gold?

When you invest in physical gold, you tend to receive the current market price of the same during redemption. However, with a Gold Bond, you can be free of any risk of additional costs of storing the gold. You can also be assured of the market value of gold during the interest period as well as during maturity. SGBs also offer several other benefits to the investor, which are: 

• Trustworthy: Sovereign Gold Bonds are issued by the RBI. Therefore, they are some of the most transparent and trustworthy options available for investment. 
• Safety: The risks of buying physical gold become very low when you invest in SGBs. Instead, they tend to earn interest for the investor. Furthermore, Sovereign Bonds do not carry any risk of loss.  
• Convenience: You can purchase SGBs online as well as offline, which makes them a very convenient choice of investment. 
• Added income: By investing in SGB, you can also earn an annual interest of 2.50%.
• Simple to trade: You can trade a Gold Bond on the National Stock Exchange, the Bombay Stock Exchange, or other financial institutions. The trading has to be done within a date specified by you. 
• Collateral: Several banks also accept Sovereign Gold Bonds as collateral against loans that have been pledged in the Demat form.
• Tax Benefits: TDS does not apply to the interest charged on Sovereign Bonds. It is not applicable even when the bond is transferred before it reaches maturity. The Capital Gain Tax is also exempt from the redemption of these bonds. 
• Minimum Investment: Investing in a Sovereign Gold Bond is one of the best and most cost-effective ways to invest in gold. This is because the total investment in this bond is as low as 1 gram of gold.

Final Thoughts

With increasing rates of inflation all over the world, it is best to expand your portfolio and invest in assets that provide added benefits upon maturity. A Sovereign Gold Bond is designed such that it facilitates gold investment without a lot of risks. Additionally, it also provides tax benefits to the investor.

Investing in SGBs is not only convenient but also quite cost-effective. SGB is, therefore, a modern investment tool, perfect for those who wish to diversify their portfolio with gold holdings. Furthermore, gold tends to excel in other forms of investment even during times of uncertainty. Therefore, investing in Sovereign Bonds can be helpful to you during a financial crisis.

For more information on Sovereign Gold Bonds, visit the Piramal Finance website. Learn all there is to know about why these bonds are the top form of investment in the current scenario and whether or not you should be availing of a personal loan for the same.