When it comes to investment, gold has been investors’ first choice in terms of returns and safekeeping. However, with changing times, Sovereign Gold Bond Schemes are becoming a popular investment choice because of the convenience of managing them.
As an investor, you are always looking for better options for increasing the value of your money. These options can include buying property, purchasing gold ornaments, investing in government-backed schemes, etc. When it comes to buying gold, India has this tradition of investing in this precious metal for centuries. But with buying gold, the responsibility of maintaining and keeping it safely also arises. In this case, there is another investment that holds equal value to physical gold, and that is - Sovereign Gold Bonds.
Suppose you want to invest in gold or something equivalent to gold. In that case, it is important to know what are Sovereign Gold Bonds, how they are different from physical gold and how they can be beneficial for your investment portfolio.
What are Sovereign Gold Bonds?
Sovereign Gold Bonds (SGBs) are a safe way to own gold without actually holding shiny coins or bars in your hand. These are government-issued bonds that are equivalent in value to the physical gold. As these are government-backed, they are as secure as they can be. When you buy SGBs, you are lending money to the government, and in return, they pay you interest plus the gold’s value when the bond matures.
Benefits of Sovereign Gold Bonds
Sovereign Gold Bonds (SGBs) are a great way to invest in gold without worrying about the hassles of storing physical gold. Here are some of the benefits of investing in SGBs:
Guaranteed Purity and Safety
SGBs are issued by the Government of India, so you can be sure that the gold is of the highest purity and is safely stored with the Reserve Bank of India.
Earn Fixed Interest
In addition to the gold price, you will earn a fixed interest of 2.50% per annum on your investment. This interest is paid semi-annually, which can help to boost your returns.
Liquidity
SGBs are listed on the exchanges, so you can easily buy and sell them before maturity. This makes them a more liquid investment than physical gold.
Capital Gains Tax Exemption
If you hold SGBs until maturity, you will be exempt from capital gains tax on the redemption proceeds. This can save you a significant amount of money on taxes.
Reduce Risk of Gold Price Volatility
While gold prices can be volatile, SGBs offer some protection against this volatility. This is because the redemption price of SGBs is based on the average gold price during the three working days prior to redemption. This means that even if gold prices fall, you will still get a fair price for your SGBs.
What is Physical Gold?
Physical gold refers to gold that exists in a tangible form, such as:
- Bars: Rectangular blocks of gold in varying weights and purities
- Coins: Bullion coins minted by governments or private mints, often with legal tender status and guaranteed purity
- Jewelry: Ornaments made of gold, often combined with other gemstones
While primarily valued for aesthetics, high-karat gold jewelry also holds investment value. If you are looking for a valuable addition to your diversified investment portfolio, physical gold can be an excellent choice.
Benefits of Investing in Physical Gold
While Sovereign Gold Bonds offer a safe and convenient way to invest in gold, physical gold also comes with its own set of advantages:
Tangible Asset
Owning physical gold provides a sense of security and control. You can hold it in your hands, store it at home, or in a safe deposit box, giving you direct ownership and peace of mind.
Hedge Against Inflation
Gold has historically maintained its value over time, acting as a natural hedge against inflation. As the purchasing power of currencies declines, the price of gold often rises, protecting your investment.
Portfolio Diversification
Adding physical gold to your portfolio can help diversify your investments and reduce overall risk. Gold prices tend to move inversely to traditional assets like stocks and bonds, providing stability during market downturns.
Liquidity
While not as instantly tradable as SGBs, physical gold can be easily sold through reputable dealers or pawnbrokers, often with quick cash access. This can be particularly helpful in times of financial need.
Cultural Significance
Gold holds cultural and emotional value for many individuals, often passed down through generations as a family heirloom. Physical possession of gold can add a sentimental dimension to your investment.
No Counterparty Risk
Unlike SGBs, which rely on the government’s creditworthiness, physical gold holds intrinsic value independent of any third party. This can be attractive to investors wary of potential financial institutions’ failures.
Sovereign Gold Bonds Vs Physical Gold
It is important to understand the difference between physical gold and SGBs to make the right decision for investment. Here is a comparison of these two:
| Parameters
|
SGBs
|
Physical Gold
|
| Safety and Security
|
These bonds are backed by the government, which makes them very safe. You would not have to worry about losing your gold.
|
While holding gold in your hand is great, it also means you are responsible for its safety. You will need to invest in a secure storage facility.
|
| Returns on Investment
|
Apart from the increase in the gold’s value, you also earn an annual interest rate, making SGBs a smart choice if you want regular income.
|
When you decide to sell, the returns here depend on the gold’s market price. No interest, just value appreciation.
|
| Liquidity
|
You can sell your SGBs in the secondary market if you require cash before the bond matures. But the prices can fluctuate.
|
Easy to sell anytime, anywhere, but you might need to find a buyer willing to pay your price
|
| Costs
|
There are no storage costs, but you may need a Demat account, which could have fees.
|
You will incur expenses for storage, insurance, and possibly making charges if you buy jewelry
|
| Tax benefits
|
No capital gains tax if you hold them till maturity.
|
Capital gains tax applies if you sell physical gold after three years.
|
Way Forward
Buying SGBs or physical gold depends on your choice and financial goals. In the end, whether you go for Sovereign Gold Bonds or physical gold, you are investing in a timeless treasure that has held its value for centuries. The ideal solution can be a blend of both options. Diversifying your portfolio with a mix of SGBs and physical gold can offer the best of both worlds, providing both security and a tangible connection to the precious metal.
Ultimately, the decision is yours. Carefully consider your individual needs and preferences, conduct thorough research, and consult with a financial advisor if necessary to make the gold investment that best fits your strategy.
Key Takeaways
- Sovereign Gold Bonds (SGBs) are government-backed investment bonds that offer the benefits of owning physical gold.
- SGBs offer regular interest income, while physical gold returns depend on market price.
- While physical gold is easy to sell, prices can fluctuate, but SGBs can be sold in the secondary market.
- SGBs have no storage costs, while physical gold incurs storage, insurance, and possibly making charges.
- Physical gold incurs capital gains tax after three years, while SGBs have no capital gains tax if held till maturity.
