Sovereign Gold Bond Benefits: Advantages and Disadvantages

Gold has always been a desirable asset in jewellery and as an investment option. A symbol of prosperity, gold is a valued metal despite its cost and is considered highly auspicious in Indian households.

However, buying and storing physical gold has drawbacks, as there is a risk of theft, and you incur storage and maintenance charges, too. Although gold is a great hedge against inflation, physical gold does not get you any returns, and the cost appreciation has been minimal over the years.

So, to make investing in gold hassle-free, the Government of India launched sovereign gold bonds (SGB) in November 2015. One of the most important sovereign gold bond benefits is that, unlike physical gold, the SGBs yield a fixed interest percentage, making it a great investment option.

What are Sovereign Gold Bonds?

Sovereign gold bonds are securities issued by the Reserve Bank of India on behalf of the Government of India as an alternative to holding physical gold. These bonds are available in terms of grams of gold.

To know the features of SGB, please refer below:

• The bonds have a maturity period of 8 years. However, investors can go for early redemption with RBI after 5 years. You can trade these bonds on the secondary market, i.e., on NSE and BSE
• It yields an interest of 2.5% per annum on the face value.
• The minimum investment quantity permitted is one gram of gold. For example, the issue price of Sovereign Gold Bond Scheme 2022-23 (Series I) for a unit of SGB was ₹5,091, which is your minimum investment amount.
• You can buy these bonds offline from nationalised banks, designated post offices, scheduled foreign banks, scheduled private banks, and Stock Holding Corporation of India (SHCIL) offices.
• To buy them online, you can visit the websites of the listed scheduled commercial banks or brokers. A discount of Rs. 50 per gram is given on the nominal value to encourage investment in online transactions.
• You can pay for sovereign gold bonds in cash (up to Rs. 20,000) or via demand draft, cheque, or electronic banking.
• You need not pay any capital gains tax on maturity if you redeem the bond with the RBI.

Advantages of Sovereign Gold Bonds

Following are some Sovereign gold bond benefits:

Low risk

There are certain risks in every investment instrument in the financial market. However, since these bonds are backed by the government of India, the chances of defaults on repayment are almost negligible. The only risk that an SGB is subject to is market fluctuations, which can cause volatility in gold prices and thus affect the returns you get from SGBs. 

Convenience

The primary purpose of SGB is to make the ownership of gold convenient. Physical gold is required in Indian families during events and festivities but comes with many additional servicing and making charges. There is always a risk of theft associated with it. The most important benefit of SGB is that it is entirely digital, making it convenient for you to invest in gold without worrying about its security and maintenance charges.

Capital Appreciation – Tax-Free

The capital appreciation generated at redemption is completely tax-free. Moreover, since gold is always in demand because of its widespread usage, the chances of unsteady movements in the intrinsic value of gold are negligible. This allows the investment corpus to grow, irrespective of market variations and global economic scenarios.

Hedge Against Inflation

A currency loses its purchasing power whenever inflation is high in a particular country, significantly affecting the returns on investment. The price of gold tends to rise when inflation is high. Hence, investment in gold schemes is considered a hedge against inflation, and sovereign gold bonds are no exception. 

Indexation Benefit

Indexation is one of the many sovereign gold bond benefits. One of the common effects of high inflation is- it causes the price of investment to rise, but the returns stay the same. Gold bonds are more considerate in this regard. Long-term capital gains from sovereign gold bonds are subject to indexation benefits. It helps you reevaluate and adjust your investment’s purchase value by considering the effects of inflation. It helps you to calculate the new value of your invested amount and the real capital gain.

Easily traded on the stock exchange

Another major sovereign gold bond benefit is that investors holding them in a dematerialised form can easily trade them on the stock exchanges. However, the liquidity available on stock exchanges is low, and because of low liquidity, SGBs trade at a discount on exchanges most of the time.

Loan facility

One of the key benefits of SGBs is that they can be used as collateral to get a loan from any of the scheduled financial institutions, as stipulated by the Reserve Bank of India’s Loan-to-Value (LTV) regulations. LTV is the ratio of the size of the loan to the value of the bond against which the loan amount is being secured. For example, if the total market value of your SGB holding is ₹1 lakh, you can get up to ₹75,000 in loan against it.

Also Read: Learn How to Buy Sovereign Gold Bond

Disadvantages of Sovereign Gold Bonds

The disadvantages of SGBs are as follows:

Long Holding Period

Many investors get hesitant to invest in gold bonds due to their long 8-year maturity period. However, this extended tenure is a significant advantage of gold bonds.

The government has set a long maturity to cover investors from potential losses caused by gold price fluctuations. It’s important to note that investors have the option to redeem the bond after just 5 years from the investment date.

Capital Loss

Investing in SGB carries the risk of capital loss because the price of bonds is linked to international gold market prices. If you purchase the bond at a higher price than its redemption value at maturity, you may incur a loss.

However, it’s important to note that gold is a significant commodity, and the government strives to maintain its price stability. If you stay invested for 5-8 years, the chances of capital losses are minimal, although it cannot be entirely ruled out.

Liquidity

SGBs have lower liquidity compared to physical gold due to a 5-year lock-in period for early redemption. Additionally, trading volume and frequency on stock exchanges may be limited.

Why did RBI Issue Sovereign Gold Bonds?

India lacks reserves of gold; hence, to meet the high demand for gold in the market, it needs to depend on imports. However, importing gold negatively impacts the macro fundamentals of the Indian economy, which in turn affects our total import bill and, consequently, our currency. Since gold is likely to be in demand forever, the RBI came up with the scheme of sovereign gold bonds as a solution.

The SGB scheme allows you to invest in gold but in a paper or digital form without requiring you to hold physical gold. Also, on maturity, the price will be fixed in INR based on the average price of the last 3 working days of 999 purity gold published by India Bullion and Jewellers Association Limited (IBJA). This is an amazing investment idea for your hassle-free capital appreciation.

Read More: What is Unit Linked Insurance Plan? – ULIP Meaning | ULIP Full Form

Should you invest in Sovereign Gold Bond

Whether you should invest in SGB depends on your investment objectives. Here are some factors worth considering:

• Your risk tolerance – While SGBs are generally considered a secure investment option, it’s important to note that the price of gold can also fluctuate.
• Your investment goals – SGBs can be an investment avenue for individuals aiming to save on taxes while earning guaranteed returns.
• Gold price – It’s essential to consider the gold value when making an investment decision regarding SGBs. Gold prices are high now. If you believe that the future trajectory of gold prices may experience an uptrend, it might be prudent to invest in SGBs now.

Evaluating these factors will help determine whether investing in SGBs aligns with your situation and objectives.

Conclusion

A sovereign gold bond scheme is the perfect solution if you are looking for an easy, low-risk, and long-term investment plan. Sovereign gold bond benefits include being able to hold gold without having to face the problems typically associated with buying physical gold. In addition, you can buy a minimum of one gram of gold by paying the equivalent price and receive the periodical interest offered by the RBI, which makes this scheme highly affordable. 

Consider investing in this scheme to diversify your portfolio and gain capital appreciation, along with a semi-annually generated interest. Though these bonds cannot be redeemed until the 5th year of your investment, you can trade them in the secondary market, thus helping you liquidate your investment as and when you wish. Although sovereign gold bond benefits undoubtedly overshadow its negligible risks, you should thoroughly research before investing.

FAQs about SGB