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Advantages and Disadvantages 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.

Factors to consider while investing in Sovereign Gold Bond Scheme

When considering investments in the Sovereign Gold Bond scheme, start by defining your investment objectives. Are you aiming for long-term wealth preservation, diversification of your portfolio or capital appreciation? Understanding your goals will help determine if SGBs align with your overall investment strategy. Engaging with a reputable stock broker can provide valuable insights into whether SGBs are suitable for your needs. Additionally, it's crucial to assess your liquidity needs. While SGBs allow for premature redemption after a fixed period, evaluating whether this aligns with your cash flow requirements is essential for your financial planning.

Another key factor is to monitor market conditions. Gold prices can fluctuate based on economic trends, which may impact the value of your gold bond investments. Being informed about market dynamics will aid in making timely decisions. Lastly, always ensure you invest through authorised channels. Purchase SGBs from recognised banks, financial institutions, post offices or stock exchanges to avoid the disadvantages of sovereign gold bond investments associated with unauthorised sources. Taking these factors into account will help you make informed investment decisions in the Sovereign Gold Bond scheme.


Advantages and disadvantages of Sovereign Gold Bond (SGB) investment

Investing in Sovereign Gold Bonds (SGBs) offers several advantages. One of the key benefits is the tax benefits; capital gains made upon redemption after the maturity period are exempt from capital gains tax and there is no Goods and Services Tax (GST) when buying or selling SGBs. Additionally, SGBs are backed by the Indian government, providing a high level of safety and security. Unlike physical gold, which carries concerns about purity and storage, SGBs are stored electronically, eliminating the hassles of theft or damage. Furthermore, they provide a fixed interest income paid semi-annually, making them attractive for investors seeking regular income.

However, there are also notable disadvantages of Sovereign Gold Bond investments. One major drawback is the lack of liquidity; SGBs have a fixed maturity period of eight years and while they can be redeemed prematurely after five years, accessing your funds sooner may be challenging. Additionally, the interest earned on SGBs is taxable, which could affect overall returns. Another limitation is that SGBs do not pay dividends, which may deter investors looking for consistent income streams. Overall, while SGBs present a secure investment option, potential investors should weigh these advantages and disadvantages carefully before committing.

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. 

Factors to consider while investing in Sovereign Gold Bond Scheme

When considering investments in the Sovereign Gold Bond scheme, start by defining your investment objectives. Are you aiming for long-term wealth preservation, diversification of your portfolio or capital appreciation? Understanding your goals will help determine if SGBs align with your overall investment strategy. Engaging with a reputable stock broker can provide valuable insights into whether SGBs are suitable for your needs. Additionally, it's crucial to assess your liquidity needs. While SGBs allow for premature redemption after a fixed period, evaluating whether this aligns with your cash flow requirements is essential for your financial planning.

Another key factor is to monitor market conditions. Gold prices can fluctuate based on economic trends, which may impact the value of your gold bond investments. Being informed about market dynamics will aid in making timely decisions. Lastly, always ensure you invest through authorised channels. Purchase SGBs from recognised banks, financial institutions, post offices or stock exchanges to avoid the disadvantages of sovereign gold bond investments associated with unauthorised sources. Taking these factors into account will help you make informed investment decisions in the Sovereign Gold Bond scheme.

How to Invest in the Gold Bond Scheme?

How to invest in the Gold Bond Scheme

Investing in the Sovereign Gold Bond scheme is a simple process. Here’s a step-by-step guide to help you navigate through it:

Step 1: Check eligibility and documentation

Before proceeding, ensure you meet the eligibility criteria. Individuals, trusts, universities and charitable organisations can invest in SGBs. Gather the necessary documentation, such as identity proof, address proof and PAN card.

Step 2: Choose an authorised channel

You can purchase SGBs through authorised banks, financial institutions, post offices and recognised stock exchanges. Ensure that the channel you select is reputable to avoid any disadvantages of sovereign gold bond investments associated with unverified sources.

Step 3: Complete the application process

Fill out the application form provided by the chosen institution. Submit the required documentation along with the form. Be mindful of the subscription periods when investing in gold bond, as SGBs are offered during specific windows.

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.
Reg Office: Bajaj Auto Limited Complex, Mumbai –Pune Road Akurdi Pune 411035. Corp. Office: Bajaj Financial Securities Ltd., 1st Floor, Mantri IT Park, Tower B, Unit No 9 & 10, Viman Nagar, Pune, Maharashtra 411014. SEBI Registration No.: INZ000218931 | BSE Cash/F&O/CDS (Member ID: 6706) | NSE Cash/F&O/CDS (Member ID: 90177) | DP registration No: IN-DP-418-2019 | CDSL DP No.: 12088600 | NSDL DP No. IN304300 | AMFI Registration No.: ARN – 163403.
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Frequently Asked Questions

What is a Sovereign Gold Bond (SGB)?

Answer Field

A Sovereign Gold Bond (SGB) is a government-backed security that allows investors to invest in gold without holding physical gold. These bonds are denominated in grams of gold and can provide both capital appreciation and fixed interest income.

What are the main benefits of investing in SGBs?

Answer Field

Investing in SGBs offers several advantages, including tax benefits on capital gains, safety as they are government-backed and no storage hassles. They also provide fixed interest income, making them an attractive option for investors.

What are the disadvantages of Sovereign Gold Bond?

Answer Field

The disadvantages of sovereign gold bond investments include a fixed maturity period of eight years, lack of liquidity before maturity and taxable interest income. Additionally, they do not offer dividends, which may deter some investors.

How does the interest on Sovereign Gold Bonds (SGBs) work?

Answer Field

SGBs provide a fixed interest rate of 2.5% per annum, payable semi-annually. This interest is added to the principal investment and is taxable, which investors should consider when evaluating returns.

Are SGBs a safe investment?

Answer Field

Yes, Sovereign Gold Bonds are considered safe investments as they are issued by the government. They eliminate concerns related to physical gold, such as theft or purity issues, making them a secure option for investors.

What is the maturity period of SGBs?

Answer Field

The maturity period for gold bond investments is eight years. However, investors can redeem the bonds prematurely after five years, providing some flexibility in accessing funds if needed.

Are there any tax advantages associated with SGBs?

Answer Field

Yes, SGBs offer tax advantages, as the capital gains on redemption after maturity are exempt from capital gains tax. This makes them an attractive option for long-term investors.

What are the potential risks of investing in Sovereign Gold Bonds (SGBs)?

Answer Field

Potential risks include price fluctuations in gold, which can affect the market value of SGBs. Additionally, the fixed lock-in period may limit liquidity, impacting investors needing quick access to funds.

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