When it comes to gold, we already know how revered it is in Indian households, thanks to its cultural and traditional significance for centuries. India has lapped up gold in all forms in recent years. However, at the household level, physical gold is held more as a savings or emergency fund. This is bewildering, considering its immense investment value.
Compared to Sovereign Gold Bonds, physical gold is bulky, needs to be stored, and has safety and theft issues. Thankfully, SGBs and Gold ETFs are better alternatives available today. The Indian government launched SGBs in November 2015. They are issued by the Reserve Bank of India and denominated in grams of gold.
What are their key features?
The government of India launched SGBs to reduce the demand for physical gold, and the scheme's operation is simple. For the government, it is like hitting two birds with one stone. It is using its gold reserves as a backing for the Bonds and, simultaneously, reducing the demand for physical gold. Its key features are:
- Magnified returns
The returns of Sovereign Gold Bonds are magnified due to the interest and prospects of capital appreciation. The government assures 2.50% interest per annum, payable half-yearly on a pre-defined date. If held until redemption, they are fully exempt from tax.
- Earlier liquidity
These Bonds are redeemed at the end of their eight-year tenure through the standard RBI window. However, there are chances of earlier liquidity. For example, at the end of the fifth, sixth and seventh year, the RBI offers a redemption window for these Bonds based on the existing market price of gold.
- Listed on stock exchanges
Sovereign Gold Bonds are also listed on the stock exchanges. There is secondary market liquidity, although in practice, liquidity is limited. If the SGB is sold in the secondary market, then the tax exemption is not available. The SGB will be taxed as long-term capital gains if held for more than three years and short-term capital gains if it is lesser.
- Easy access
Investing in Bonds is relatively simple. For instance, if you have a Trading Account with a stockbroker and a Demat Account, you can buy the Gold Bonds online in just a few easy steps.
- Only for resident Indians
Only resident Indians can invest in Sovereign Gold Bonds. NRIs, OCBs, or even FPIs are not permitted to invest in these instruments. However, individual investors who change their residential status from resident to non-resident may continue to hold SGB until early maturity.
- No investment charges
The Sovereign Gold Bond scheme is also free from making charges, storage costs, and other hidden charges applicable in other forms of gold investments. There are no investment or recurring management charges to invest in them.
Conclusion
Sovereign Gold Bonds present a smarter and more effective way to invest in gold. Approximately 10% to 15% gold exposure is ideal to hedge the portfolio for the long term.
