How valuable is your Sovereign Gold Bonds investment?

6 MinsAug 22, 2022

Gold can be a great addition to your portfolio. It is a natural hedge against inflation and currency risk. Experts suggest that including 10%-20% of gold in your investment portfolio can help balance out any market fluctuations.

Physical gold in the form of coins and gold biscuits is one way to go. However, an alternative to consider is Sovereign Gold Bonds if you want to make the most of your gold investment.

Sovereign Gold Bonds Investment

What are Sovereign Gold Bonds?
Sovereign Gold Bonds (SGBs) are government-backed securities that the Reserve Bank of India issues on behalf of the government. SGBs are denominated in gold, meaning they are directly linked to the value of gold. Each unit of an SGB is equivalent to one gram of gold. Think of it as a paper gold investment.
When you invest in SGBs, you get fixed interest on your investment. Apart from that, there is also a secondary market in which you can sell your SGBs and profit from capital gains. You can also hold these instruments jointly with someone else.
As an individual or a HUF, you can invest in up to 4 kgs of SGBs. The maximum limit for trust and entities is 20 kgs.

How to invest in Sovereign Gold Bonds?
SGBs are issued in tranches by the RBI. When the RBI announces a sale, you can invest in Sovereign Gold Bonds through nationalised banks, scheduled private banks, foreign banks and post offices. You can also buy them in the secondary market through authorised exchanges or the Stock Holding Corporation of India. You can also invest in Sovereign Gold Bonds online through the websites of authorised commercial banks.

How does the price of gold impact Sovereign Gold Bonds?
SGBs are denominated in gold. They are issued at fixed rates depending on the price of gold at the time of issuing the SGB. Therefore, the price of SGBs is directly linked with the price of gold. If gold prices go up, then the value of your existing SGB will also go up. It will command a higher price in the secondary markets.
When the price of gold falls, the value of your SGB will also decline accordingly. This is because if the price of your SGB were to remain high, then people could buy gold in the primary market at a lower price. To compensate for the same, the price of your SGB will fall in secondary markets. However, you could hold your SGB until maturity to recover your invested value.

Why invest in Sovereign Gold Bonds?
Investing in gold is a smart move for a well-balanced portfolio. Instead of investing in physical gold or jewellery, when you invest in Sovereign Gold Bonds, there are numerous benefits.

1. Safety:
SGBs are free from all the risks associated with holding physical gold. They cannot be stolen or lost. You will always have a Certificate of Holding of your SGB. Moreover, SGBs enjoy a sovereign guarantee and do not carry any other risk apart from market risk.

[Also Read:How Fixed Deposits help during market volatility]

2. Inflation Hedge:
Gold is a natural hedge against inflation. When you invest in SGBs, you buy an instrument that protects your portfolio from extreme price fluctuations. Historically, the value of gold has increased over time. Sovereign Gold Bonds will provide you with the same benefits without the added risk of physical gold.

3. Additional Source of Income:
Physical gold can only give you capital appreciation. SGBs pay an annual interest of 2.5% that is paid semi-annually. This can be an additional source of income for you if you invest in Sovereign Gold Bonds.

4. Easy to Invest:
It is straightforward to invest in Sovereign Gold Bonds. You can do it online if you don’t want to invest physically by visiting a bank or a post office. Moreover, the bond’s issue price is usually about Rs. 50 cheaper per gram of gold when you apply online.

5. Easy to Store:
You can store your SGB in a Demat account. Even if you purchase an SGB offline, you can request that the same be stored in your Demat account.

6. Easy to Trade:
You don’t have to hold your Sovereign Gold Bond to maturity. They are traded on exchanges. For instance, after five years of holding the bond, you can sell it on the National Stock Exchange or the Bombay Stock Exchange.

7. Indexation Benefit:
You can benefit from indexation if you sell your Sovereign Gold Bond before it matures. Indexation is a process by which you can adjust the purchasing price according to the value based on inflation. This way, the tax you pay on it will be lower.

Sovereign Gold Bonds are wise investments to make. The price of SGBs is linked to gold, which means that if the gold value increases, your SGB also becomes more valuable. However, in addition to the benefits of capital gains, you can also earn interest on your SGB investments.

Disclaimer:This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.