Published on April 12, 2024 at 4:22:14 AM
Want to add gold to your kitty? Here's why SGB is a good option
No investment is fool proof, but there is a certain degree of safety offered by some instruments such as fixed deposits with banks or government bonds. These are usually referred to as safe havens. Basically, it means, there is lesser chance of a fall in value of the instrument over a longer duration, than some other securities such as shares. Gold is also one such instrument.
Although gold prices do fluctuate, the yellow metal has provided consistent return over the long run. Investment in gold is also a safe-haven as investors scramble to invest in gold during economic and market turmoil. So, along with risk-averse investments like fixed deposits, bonds, etc, investors may also consider gold as another prospective way to diversify their portfolios.
Issues with Gold Investments
However, there are some safety issues and risks associated with gold investments as well – like keeping the physical gold in safe custody, impurity, loss of making charges, etc.
Safety of Physical Gold: As gold is a precious metal, there are always risks of theft, burglary, etc. So, keeping gold in physical form is a headache for the owner. As a result, to ensure the safety of gold, the owner needs to hire a bank locker and pay rent for it. However, in the unfortunate event of a locker break, the owner can’t claim the gold back as the content of a locker is not disclosed. So, the owner needs to spend more to insure the gold for further protection. Insurance is also necessary to protect against the loss of gold when it is being used after taking out of a locker. So, investing in physical gold involves risks and costs.
Purity Issues: While buying physical gold, there is always a concern about the purity of the gold content. An investor would stand a loser by getting impure gold after paying for pure gold. The introduction of Hallmark aims to address this issue. However, as the hallmarking process is not centralised and outsourced to local operators, a machine error during checking the purity of gold would make hallmarking erroneous.
Taxes and Making Charges: Taxes and making charges (for gold ornaments) paid during purchase can’t be recovered during the selling of the gold / gold jewelleries, thereby impacting the return on investment (ROI).
Capital Gain Tax: While selling physical gold, depending on the period of holding, the investor has to pay capital gain tax, which would further reduce the ROI.
Loss of Opportunity Cost: During the period of investing in physical gold, the money invested would remain stuck and the investor would lose the opportunity to earn some interest on the amount of money.
How to overcome the shortcomings
As India is a huge gold importer, the government introduced ways to invest in gold without buying it in physical form.
Such alternative ways of gold investments include Gold Funds offered by mutual fund companies, Electronic Gold offered by Gold Exchanges, Sovereign Gold Bonds (SGB), etc.
While Gold Funds, Electronic Gold, etc address the issues of keeping physical gold safe, loss of making charges, etc, taxation and loss of opportunity cost remain as pain points.
Sovereign gold bonds tend to address most of these issues, making it the best option.
History of sovereign gold bonds or SGBs
The government introduced sovereign gold bonds in 2015 to help cut gold imports that have been a huge burden on the exchequer. The scheme incentivises investment in non-physical gold through interest payment and tax-free return.
SGBs are basically government securities, hence carry little risk, denominated in gold. A resident of India, including individuals, HUFs, trusts, universities and charitable institutions can buy SGBs. What happens if a person buys a gold bond while being a resident and then changes residency status? No issue. The person is allowed to hold the SGBs bought as a resident till redemption or maturity.
The bonds are denominated in one gram of gold and in multiples thereof, allowing a maximum investment of 4 kg for individuals and HUFs and 20 kg for trusts each year.
Why SGBs are a good option
Among the several benefits of investing in SGB, some are –
Safest: The underlying gold reserve against the SGB investments is kept in the safe custody of the Government of India (GOI), so investors needn’t worry about safety. The investment is also absolutely safe as it is backed by the sovereign guarantee of the GOI. So, there is no default risk as well. On redemption, the prevailing price of 999 quality gold will be paid to the investors, thus eliminating the risk of losing money due to the impurity of gold.
No Extra Cost: Apart from saving the expenses to ensure the safety of gold, investors don’t pay anything extra in taxes and making charges at the time of investment. Individual investors are also exempted from paying capital gain tax on maturity or after 5 years from the day of investment.
Regular Return: SGB also tends to address the issue of the loss of opportunity cost by providing a fixed interest on the amount of initial investment at a rate of 2.50 per cent per annum, payable semi-annually.
Tax: While interest as added as income for tax computation, capital gains on redemption is tax free. Even in case of early transfer, the holder of SGBs get the advantage of indexation.
Disadvantages
Investment Limit: At the time of issuance of SGB, an investor is allowed to invest for a minimum of 1 gram of gold and the maximum limit is 4 kg.
Liquidity: SGBs have a maturity period of 8 years. However, investors may redeem the bonds after the expiry of 5 years from the date of issue. Although SGBs are listed for trading in stock exchanges, investors may face liquidity issues at the time of selling the bonds on exchange platforms due to a shortage of buyers and vice versa.
Quantum of Return: Like any other gold investments, SGB investors also face the risk of capital loss, in case the price of gold falls below the issue price at the time of maturity, redemption, or sale.
Performance of SGBs Over the Years
Here is a list of some of the SGBs currently trading on NSE (as on March 7)
SYMBOL | ISSUE PRICE | LTP | Percent Change |
SGBDEC2512 | 2,840.00 | 6,540.00 | 130.28 |
SGBJUL25 | 2,780.00 | 6,440.00 | 131.65 |
SGBOCT26 | 3,096.00 | 6,450.00 | 108.33 |
SGBSEP24 | 3,150.00 | 6,428.89 | 104.09 |
SGBAUG24 | 3,119.00 | 6,415.00 | 105.67 |
SGBMAR24 | 2,916.00 | 6,498.99 | 122.87 |
SGBMAY25 | 2,901.00 | 6,410.00 | 120.96 |
SGBJAN27 | 3,164.00 | 6,330.00 | 100.06 |
SGBOCT25IV | 2,937.00 | 6,399.00 | 117.88 |
SGBNOV24 | 2,957.00 | 6,408.00 | 116.71 |
SGBMAR25 | 2,893.00 | 6,367.08 | 120.09 |
SGBDEC26 | 3,069.00 | 6,400.00 | 108.54 |
SGBDEC25 | 2,911.00 | 6,201.00 | 113.02 |
SGBNOV25IX | 2,914.00 | 6,350.00 | 117.91 |
SGBFEB27 | 3,276.00 | 6,270.00 | 91.39 |
SGBJAN26 | 2,831.00 | 6,398.00 | 126.00 |
SGBDEC2513 | 2,816.00 | 6,255.00 | 122.12 |
SGBNOV25 | 2,884.00 | 6,305.00 | 118.62 |
SGBDEC25XI | 2,902.00 | 6,290.00 | 116.75 |
SGBOCT25V | 2,921.00 | 6,300.00 | 115.68 |
SGBNOV25VI | 2,895.00 | 6,360.00 | 119.69 |
SGBMAY26 | 3,064.00 | 6,396.78 | 108.77 |
SGBOCT25 | 2,906.00 | 6,380.00 | 119.55 |
SGBNOV258 | 2,911.00 | 6,437.90 | 121.16 |
Conclusion
Sovereign gold bond is a way to start investing in gold without the risk of physical carriage, and with tax advantage. It also offers some interest every six months, lifting the overall return. According to the back-of-the-envelope calculations, returns from SGBs that have matured so far is around 12%, and that too tax free. This makes for a compelling reason to add SGBs in your portfolio.
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