Sovereign Gold Bonds (SGBs)

The Timeless Investment That Has Stood the Test of Time

For many years, gold has been seen as a secure investment, particularly when the economy or markets are unstable. Investors frequently resort to gold during times of crisis as a method to diversify their portfolios and lower risk. Unlike other investments that can be impacted by economic factors or geopolitical events, gold is seen as a stable and secure asset that can hold its value over time. Since it may help create a sense of security and stability during uncertain times, gold has been a popular choice for investors and central banks.

Indian women, in particular, have a strong affinity for gold jewellery and often consider it a form of security in times of financial instability. It is not uncommon for Indian women to save up and buy gold over time, building up a collection of valuable jewellery that can be used in times of need. But over the due course of time investment in gold as an assist has changed. There are now numerous options available, including physical gold, digital gold, gold exchange-traded funds, and sovereign gold bonds (SGBs). Which type of investment, though, is preferable?

Let’s find out….

Physical Gold

The traditional method of purchasing gold from the jewellery stores in our neighborhood is in the form of physical gold. Many people would like it simply because it is physical and can be purchased with liquid cash and the transaction might not be recorded. Yet there are drawbacks to purchasing actual gold as well. A few of these include storage problems, high manufacturing costs, the 3% GST on sales, and unpredictable prices. The quality of the actual gold, the lack of a regulatory authority, and the taxation issue are, however, the most troublesome aspects. When it comes to Short Term Capital Gain Tax (STCG) on gold (less than 3 years), STCG tax would be added to one’s over-all income and taxed at slab rates and when it comes to Long Term Capital Gain Tax (LTCG) for more than 3 years, 20% tax with indexation advantage.

Digital Gold

As the name implies digital gold can be bought digitally at whatever amount one may wish to invest. It is available for purchase from several financial platforms, including PayTM, Google Pay, Phone Pay, etc. When purchasing gold digitally, issues of purity and storage are unimportant. The benefit of digital gold is that it can be instantaneously and easily liquidated with just a click on a smartphone. But following disadvantages of purchasing digital gold also exist:

1. A 3% GST cut (You buy Rupees 1L of gold, you get 97k worth of gold)

2. There is a large price gap between the buy and sale prices along with the additional charges of 2-3% for storage, and insurance

3. Not subject to regulation

Gold ETFs (Exchange Traded Funds)

Investment funds called gold ETFs (Exchange Traded Funds) let investors purchase and sell shares of the fund on a stock exchange while also tracking the price of gold. Gold ETFs often invest in bullion, coins, or futures contracts, and the price of gold is reflected in the share price of these funds. Without having to purchase and store physical gold, gold ETFs might be a tempting method to invest in gold.

The fact that gold ETFs are a reasonably option to invest in gold is one of their benefits. Like a stock, investors can purchase and sell shares of the ETF on a stock market, and the investment normally entails no storage or transit charges. Another advantage of gold ETFs is that they are highly liquid. Investors can buy and sell shares of the ETF on a stock exchange at any time during trading hours, which provides flexibility and ease of access.

However, it is crucial to remember that investing in gold ETFs entails some risks, including the possibility of counterparty default and volatility in gold's price. Also, some gold ETFs might not be backed by actual gold, so it's crucial to do your homework before investing in a certain ETF.

Sovereign Gold Bonds (SGBs)

The Reserve Bank of India (RBI) issues Sovereign Gold Bonds (SGBs), which are government securities valued in kilos of gold and issued on behalf of the government. SGBs can be purchased from post offices, commercial banks, and other financial organizations. These bonds are a relatively new alternate investment choice for people who wanted to invest in gold but did not want to buy actual gold owing to storage and security issues. The minimum investment is one grams of gold, with a maximum investment of four kilograms per person per fiscal year. The price of the bond is related to the current market price of gold.

SGBs are regarded as an investment choice for a variety of factors. First, they provide a set interest rate of 2.5% yearly, which is paid on the nominal value of the bond semi-annually. Second, if held until maturity, they are exempt from capital gains tax, making them a desirable investment choice for long-term investors. Lastly, because they are government-issued, they are a low-risk investment choice.

SGBs can be bought and sold by investors on the secondary market as well because they are tradable on stock exchanges. The bonds have an eight-year maturity length, with a fifth-year departure option on the interest payment dates. Other benefits of the programme, including a set interest rate, exemption from capital gains tax, and tradability on stock markets, have made it a very popular choice for investors.

From its inception, the programme has assisted in lowering the import of actual gold, and has moved unused gold into the legal banking system. Sovereign Gold Bonds are becoming a well-liked investment choice for people who want to invest in gold but do not want to take on the danger and expense of physical gold.

CONCLUSION: Those who wish to invest in gold but do not willing to bear the risk and expense of actual gold are increasingly using sovereign gold bonds as their method of investing. Yet, given the pros and cons of the different investment options, one may select the one that is more lucrative for oneself.