In India, gold investments have always been considered above the rest. They are believed to be a safe option to invest in and get passed on for generations. However, when one wants to invest in Gold, there are multiple options to do so. Jewellery, gold bricks, and even online gold reserves. But which of these are the right ones to invest in?

Buying physical gold and jewellery comes with its own headaches. Jewellery has ‘making charges’ on top of gold prices, and when you sell it, there are charges like wastage and melting charges. Also, the purity of the gold is always in question when you are selling it. Since the gold is in physical form, it will also come with storage challenges.

All of these can be eliminated by sovereign gold bonds, since they are not in physical forms, and nor do they deteriorate over time. One can purchase them at the current price of gold, and at maturity they get the price of gold at that time, in multiples of grams, without any charges. Moreover, they earn you annual interest, too.

What is a sovereign gold bond?

Sovereign Gold Bond (SGB) is a gold investment alternative to physical gold. With logistical issues and declining demand for physical gold, SGB was introduced by the government of India in Nov 2015.

SGB is considered government security, and the price is counted per gram. The multiples of grams of gold decide the value of the SGBs. They can be purchased with an application form from issuing banks, SHCIL (Stock Holding Corporation of India Limited) offices, designated post offices, and SEBI-approved brokers.

Benefits of Sovereign Gold Bonds

The risks associated with the physical gold are mitigated. No designing, storage, or wastage charges are applied as this is a digital form of gold. SGBs also earn interest over the years.

The annual interest rate on the issue price for SGBs is 2.5%

The maturity price is adjusted to the rate of the gold at the time of maturity, offering indexation benefits.

The bonds can be dematerialised (demat) and can be traded on the stock exchanges after five years of investment. The SGB can be traded on both NSE and BSE.

Many banks and NBFCs consider SGB as collateral, over which you can apply for loans. 

If you apply online for an SGB, ₹50 discount per gram is applied to your SGB on the purchase price.

Features

All Indian residents- individuals, HUFs, trusts, and universities can invest with SGB. In the case of minors, an adult will have to invest on behalf of them.

The minimum investment can be one gram, and then, the bond can be bought with the multiplication of one gram, up to the maximum amount of four kilograms for an individual and 20 kilograms for trusts and institutions.

The SGBs are only issued by the RBI, on behalf of the central government. Investors get a holding certificate for the investment, and it can be converted into demat form, too.

A KYC (know your customer) procedure is required before the purchase. Identity proof such as a PAN card, driver's licence, voter's ID, or passport is required for identity and address proof.

The interest earned on the SGB is taxable, however, the capital gain on the redemption is considered a long-term gain, and the individuals are exempted from it.

Every year, the RBI will issue the dates on which SGBs would be available for purchase. The price of the bonds is decided on the average closing price of the 999 purity gold for the last three business days of the week preceding the issue date. The price is published by the India Bullion and Jewellers Association (IBJA).

Similarly, the redemption price of the maturity will be the average closing price of the 999 purity gold for the last three business days before redemption, published by IBJA. 

Maturity Period and Returns

The maturity period for the bond is 8 years, however, the early redemption or encashment of the bond is allowed after the fifth year of the issuance date. The SGB will also be tradable on the Exchanges platforms if it is in the demat format.

The interest rates on the SGB currently are 2.5% per annum, and on maturity, the price of the gold at the time of maturity can be redeemed. In short, if you buy an SGB today, you will get the price of the gold whatever it is at that time.

Risks

As for any investments, there are chances of capital loss with SGB, if the price of the gold declines. Therefore, if the prices of gold go down during the tenor and are still low at the time of maturity, it will result in a capital loss.

*Disclaimer: Consult market experts before making any kind of investment.

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