Should you invest in Sovereign Gold Bonds?

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Introduction

Investment in Sovereign Gold Bonds is always better than investing in physical gold. It ensures safety, no making charges, no capital gains tax for 8 years, and earns 2.5% interest every year.

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.

The Bond is issued by Reserve Bank on behalf of the Government of India.

Advantages of Sovereign Gold Bonds

  • If there is a plan to invest in Gold, investing in SGBs will be a good option.
  • No Capital Gains Tax: There is a lock-in period of  8 years on maturity and also there won’t be any capital gain tax.
  • Earn 2.5% Interest Every Year: Every year there will be an interest of 2.5% which will be added to the income. Hence, it will be taxable based on the income slab of the person.
  • Can be Sold on Exchanges: If SGBs are in Demat form and you want to sell them, they can be sold in the secondary market in exchanges. Provided if there is demand for it. If the bond gets sold by matching the demand and supply then the money will be encashed in 3 days.
  • No Brokerage Charges: If these bonds are sold in the secondary market then brokerage charges are levied.
  • SGBs can be used as collateral for loans.
  • Security: Also, SGBs are secure, as there are no storage hassles like physical gold.
  • No Expenses: There is no expense ratio for exchange bonds. This means if money is invested in gold funds then the fund house will charge the expense ratio. If an investment is done in ETF then this also charges some expense ratio.
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How to Invest in Sovereign Gold Bond Scheme 2021-22

  • It can be applied from the Demat account.
  • In FY22, RBI will issue 6 tranches of SGB. The first tranche will come on 17th May 2021 and will last till 25th May 2021.
  • The issue price for Sovereign Gold Bond Scheme 2021-22 Series-I has been fixed at Rs. 4,777 per gram.
  • It could be invested using net banking as well or else you can check with the relationship manager or customer care for more guidance.

Approach on How to Invest in SGBs

  • There are different tranche’s that are issued. The minimum allocation should be given to every tranche which is like SIP. It is not known when this issuance will be there.
  • Normally Government of India comes in 2 tranches with 6 issuances each of SGBs in a year. So allocation could be done accordingly.
  • On maturity of these bonds, they can be reinvested by the new bonds that the government will be issuing then.
  • If not, SGB can be sold off as there won’t be any capital gain tax on it, as the tax is already paid on the interest.
  • So the investment approach should be on regular basis.
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Is Gold a Good Long Term Investment?

Yes, if there is diversification in the asset class, there should be an allocation of 5%-10%. It can be a good long term investment as it ensures liquidity whenever you go to the market to sell it. But it should not be invested from a Hedging point of view to beat inflation.

Also Read: Is Copper the New Gold?

Conclusion

Normally whenever there is a stagnancy, the allocation could be done.

It is seen that in the past 1-2 years, this asset class gives good returns. Based on the asset allocation such kind of allocation needs to be done.

SGBs are the best option to have some allocations in the gold as an asset class.

Also Watch: How to Invest in Sovereign Gold Bonds?

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