Merits and Demerits of Sovereign Gold Bond (SGB) Investment

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Synopsis:

In India, gold has always been considered a reliable and safe haven for investors, offering returns and liquidity with ease. However, keeping physical gold with you may have some drawbacks, Sovereign Gold Bond Schemes offered by the Indian Government. As practical and safe as these instruments are, they have merits and demerits you should know about.

The Indian government has launched several investment initiatives to provide Indian investors with secure and assured ways to allocate their capital. Sovereign Gold Bond Schemes may be considered if investors do not want to invest in physical gold. Gold investment has always acted as a hedge against inflation, provides liquidity, and assures investors of regular returns. Since Sovereign Gold Bonds (SGBs) are issued by the government, several investors who may not have a high-risk profile may be inclined to consider this option for investment. While investing in these bonds may have its pros, you should learn about them more thoroughly before you invest and learn about their advantages and disadvantages. 

Article Highlights 

The following article about Sovereign Gold Bonds chiefly highlights the following:

  • What are Sovereign Gold Bonds?

  • Features of Sovereign Gold Bonds

  • SGBs or Physical Gold?

  • Merits of Sovereign Gold Bonds

  • Demerits of Sovereign Gold Bonds 

What are Sovereign Gold Bonds?

Simply put, Sovereign Gold Bonds are government-backed securities whose denominations are represented in terms of grams of gold. In essence, they act as physical gold. Investors who wish to invest in these bonds must pay cash for the issue price and invest in bonds for a period. On maturity, the bonds may be redeemed in cash by the investor. 

The bonds are issued by the Reserve Bank of India on the government’s behalf.  They were first launched in 2015 to reduce physical gold demand in the country and promote the investment of domestic savings into financial instruments. Sovereign Gold Bond schemes also aim to establish funding sources for the Indian government and diversify the government’s borrowing instruments.

Features of SGBs

When you invest in Sovereign Gold Bonds, you should know about their features: 

  • Sovereign Gold Bonds are issued as 99.5% purity of gold.

  • Sovereign Gold Bonds are held as digital assets and you can store them in a Demat account.

  • Sovereign Gold Bonds have a lock-in period after which they can be redeemed.

  • The redemption price of Sovereign Gold Bonds are based on the average closing price of 99.5% gold purity three days in advance of the redemption date. 

SGBs or Physical Gold?

You may discover many advantages of Sovereign Gold Bonds, but you may still believe in traditional gold investment. While both kinds of investments have their advantages and disadvantages, you may select them on the basis of your risk profile, financial circumstances and aims, needs for liquidity, and your taxation considerations. It is important to note that Sovereign Gold Bonds offer the benefit of potential capital appreciation if bonds are held till maturity, as well as offering an income source in terms of interest. There is also the advantage of holding gold in a digital form of investment where the purity is assured and the units you hold are protected whether their value increases or decreases. 

The Merits of Sovereign Gold Bonds

The following are the merits of investing in Sovereign Gold Bonds: 

  • Investment is secure as the investor gets the market price of gold when the bonds are redeemed.

  • The investor also gets a fixed rate of interest while they remain invested.

  • Sovereign Gold Bonds avoid the issues of gold purity since they are held as 99.5% pure gold units. Additionally, there are no charges like making charges involved in SGB investment (relative to investment in physical gold).

  • SGBs come with tax benefits if an investor remains invested till the bonds mature. 

  • The bonds may be used as collateral against loans.

The Demerits of Sovereign Gold Bonds

While Sovereign Gold Bond Schemes have several advantages, there are also some demerits of investing in them:

  • If the price of gold falls, then investors face some capital loss. 

  • As Sovereign Gold Bond investment comes with a stipulated lock-in period, this investment potentially lacks liquidity.

  • While the interest income generated by SGBs is taxable, the redemption amount on maturity is not. 

Sovereign Gold Bonds - Worth It?

If you are wondering whether it’s worth investing in Sovereign Gold Bonds, it all depends on you, the individual investor and your needs and financial goals. When investors compare SGBs to physical gold investment, they may explore the merits and demerits of SGBs. Nonetheless, Sovereign Gold Bond Schemes pave the way for safe and secure investment if you wish assured returns (in terms of interest) and potential profitability when the bonds reach maturity. 

Disclaimer:Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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