Sovereign Gold Bond Scheme – Should you invest?

Let us see if we should invest in current Sovereign Gold Bond scheme. What are the Pros and Cons in investing in Gold via Sovereign Gold Bond Scheme.

Please find the details of latest Sovereign Gold Bond Scheme 2021-22 – Series IV.

Issue NameSovereign Gold Bonds Scheme 2021-22 – Series IV (Tranche 53)
SymbolSGB212204
ISININ0020210111
Issue PeriodMonday, July 12 to Friday, July 16, 2021
Issue PriceOnline BID: Rs. 4,757 per gram
Offline BID : Rs. 4,807 per gram
Minimum Quantity1 gram & in multiples of 1 gram
Maximum QuantityThe maximum limit of subscribed shall be 4 KG for individual, 4 Kg for HUF and 20 Kg for trusts and similar entities per fiscal (April-March).
Rate of Interest2.50% per annum on the amount of initial investment. It shall commence from the date of its issue and is payable every 6 months.
Date of AllotmentJuly 20, 2021

Why invest in Gold

Asset allocation is one of the proven ways of managing our portfolio and avoid putting all eggs in single basket. Since equity is best asset for long term returns, people tend to invest more and more in it based on returns.

However Equity asset class is very volatile and can give large negative returns in few years. In order to safeguard overall portfolio health, we need another asset class which is negatively co related with Equity.

Negative co relation means generally asset prices move somewhat is opposite directions. Past history has shown Gold price do increase when Equity falls. This helps provide some cushion to your overall portfolio value.

Another reason is craze for Gold is still high in India. If you wish to gift gold to your daughter or daughter in law during marriage, you may like to invest in it.


How much to invest in Gold asset

Generally expert suggest 5-10% of your portfolio should be in gold. However such low exposure may not give appropriate hedging to portfolio.

You may like to read more on this to understand how to arrive at appropriate asset allocation by reading article (click on link).


Ways to Invest in Gold

  • Invest in physical gold – coin, bars, jewelry
  • Investing via Gold ETF – You can use Sub brokers like Upstox or Motilal Oswal
  • Investing via Gold Mutual Funds- You can use apps like Kuvera or INDMoney for same
  • Buying Digital Gold – You can use apps like Kuvera or INDMoney for same
  • Investing in SGB (Sovereign Gold Bonds) – – You can use Sub brokers like Upstox or Motilal Oswal

Now, let’s see pros and cons of investing via Sovereign Gold Bonds.


Advantages of Investing in Gold using Sovereign Gold Bond Scheme

  • It carries a fixed interest rate of 2.50% per annum on the amount of the initial investment. Interest is credited semi-annually to the bank account of the investor.
  • You can easily purchase SGBs online and hold the bonds in demat form.
  • SGB prices are linked to the price of gold of 999 purity published by India Bullion & Jewellers Association (IBJA).
  • Investing in SGBs eliminates the risk of theft and the cost of storage.
  • Investors are assured of the market value of gold at the time of maturity and periodical interest.
  • SGBs are free from issues like making charges and purity associated with purchase of gold in jewellery form
  • SGBs have a tenure of eight years, early encashment/redemption of the bonds is allowed after the fifth year but these bonds are tradeable on exchanges.
  • Interest on SGBs is taxable but the capital gains tax arising on redemption of the bonds is exempted for individuals.
  • SGBs can be used as collateral for loans.
  • Sovereign gold bonds carry the sovereign guarantee as these are issued by the Reserve Bank of India on behalf of the Government of India

Dis advantages of Investing in Gold using Sovereign Gold Bond Scheme

  • Purchasing Gold like SIP every month is practically difficult. We can purchase only in window opened by RBI
  • Interest rate is taxable. So 2.5% comes down to much lesser if you are in high tax bracket.
  • To get Long Term Capital Gain exemption, one needs to hold for full tenure of bond.
  • Early redemption is via Stock Exchange so price would depend on demand supply.

Conclusion

Sovereign Gold Bond is excellent way to invest in Gold provided you are okay with lock-in. It is most tax efficient approach if you hold on to it for full tenure.

You get the returns of gold without any worry of theft or defaulting. It also pays interest half yearly which is not much but still should be counted over and above gold returns.

With current scheme valued at 4757/- per gram, we will be investing almost around 10% lower than highs gold touch so looks a reasonable price from long term perspective.

Also Gold is more for us as hedging asset to safeguard against Equity asset class. Based on asset allocation, you may consider this option provided you are okay with lock-in period.

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