Sovereign Gold Bond Quick Strategies
Sovereign gold bonds or SGBs have managed to garner attention from investors recently. It comes with its own benefits and risk factors. There are several strategies that you need to go through so that you can make an informed decision of whether to invest in SGBs or not. These are backed by the Government of India and a stress-free investment option.
Gold as a commodity is deeply rooted in Indian culture and gold jewellery has been passed on in families from one generation to another as a part of tradition and rituals. They are considered a stable investment instrument that ensure financial stability. However, time has changed, and young investors are looking for alternative investment options which doesn’t need them storing gold at their homes.
This resulted in the launch of Sovereign gold bonds (SGBs) in 2015, which are expressed in gram(s) of gold. The Reserve Bank of India issues the bond on behalf of the Government of India and they are a great way to diversify your investment portfolio. These government securities are a great alternative to owning the metal itself. Here, you do not have to worry about the risks of storing gold including storage costs, safety, and making charges. They are available in tranches and can be easily availed by investors. Moreover, investing in SGB can help you hedge against economic conditions such as political events, inflation, and market volatility.
General features of SGBs
Before you make the decision to invest in SGBs, you should know about its main features. Here is a sneak peek.
- SGBs are an investment scheme to invest in gold in a subscription model. The bonds are issued in terms of grams.
- SGBs can be availed by charitable institutions, universities, trusts, Hindu undivided families (HUFs), and resident individuals.
- When compared to physical forms of gold, SGBs offer higher returns on your capital.
- A fixed annual interest rate of 2.5% applies to the SGBs.
- The upper limit of SGBs is capped at 4 kgs for every individual investor and 20 kgs for trusts.
- They come with a tenure of 8 years, but one can exit and sell the bonds from the 5th year. This may be done only on the dates of interest payouts.
- They can be purchased through Stock Holding Corporations of India Limited, various stock exchanges like the NSE and the BSE, designated post offices, and commercial banks.
- An investor can invest in SGBs in joint holdings.
- Investors can hold SGBs in demat format or get physical certificates.
- They can be bought online with the help of net banking. You can even complete documentation processes such as nomination details and KYC via your net banking account.
Investing in SGBs: Pros and Cons
Every investment comes with its own share of advantages and disadvantages. Let us dig deeper so that you can make an informed decision. We will start with the pros of investing in SGBs.
- It can aid in portfolio diversification.
- You get to earn a fixed interest rate of 2.5%.
- Your SGB is protected by the Government of India, which means that your SGB investment is resistant against market fluctuations.
However, there are some disadvantages as well which you should consider.
- Gold prices are prone to fluctuations and thus, your investment might be impacted.
- If you want to redeem SGBs, you might have to sell them at a lower price when compared to the purchasing price.
- If investors are unwilling to buy your SGB investments, you might have to endure liquidity issues temporarily.
- The fixed interest rate might fail to keep up with the inflation rates or changes in inflation rates.
Strategizing your SGB investment
While SGBs come with its own set of benefits and security, you need to plan your investments to get the maximum out of them. First, understand that SGBs and the interest gained through your investments are taxable according to tax slabs. Selling SGBs in the secondary market attracts capital gains tax.
However, SGBs are more tax-efficient when compared to physical forms of gold or gold jewellery. Gold comes under non-financial asset which means funds from the sale of gold will attract short-term capital gains tax if sold within three years. On the other hand, if you sell gold sold after 3 years, it will result in long-term capital gains tax; without indexation at 10% and with indexation at 20%.
SGBs are backed by the government and generally considered a safe investment option. Moreover, your investments are protected from inflation-related risks. However, you should keep in mind that gold investments should constitute only 5-10% of your investment portfolio. Since the price of gold fluctuates, channelling all your savings in SGB is not a smart idea.
Riding the SGB wave: Get expert guidance
As an investor, make sure to get in-depth understanding of the main characteristics of the bond before investing in it. You can also gain a understanding of the nuances of SGBs by seeking expert guidance. Specialist financial advisors can guide you to use SGB as a useful inflation hedging technique and help you understand how gold investments can enhance your portfolio despite the risks. Use cutting-edge tools to boost your investments and reach your financial objectives with one of India's fastest-growing trading platforms.