Gold is an age-old investment avenue for us Indians, especially around the festive and wedding seasons. Over the past decade though, there has been a shift in the way we invest in this precious metal. Moving from the traditional forms of jewellery, gold coins and gold bars, we now have gold ETFs (exchange traded funds), SGBs (sovereign gold bonds) and digital gold as options. Of all these forms, SGBs shine the brightest. Let’s explore how and why.

What are Sovereign Gold Bonds?

Sovereign gold bonds are government securities issued by the RBI. SGBs are denominated in gold, each unit representing one gram of gold. These were first launched in November 2015, as an alternative to physical gold.

How do Sovereign Gold Bonds work?

The bonds are offered by banks, designated post offices and authorised stock exchanges from time to time. The tenure of these bonds is eight years, with a fixed lock-in period of five years. On maturity, the redemption proceeds are credited to the bank account directly. However, you may sell the bonds on the stock exchange before maturity but after the lock-in period.

One of the main reasons SGBs are better than all other forms of investing in gold is the interest one earns. In addition to the appreciation in the price of gold, an interest of 2.5% per annum is paid out to investors semi-annually.

Further, there is no tax on capital gains on the redemption proceeds at maturity. Only the interest is taxed as per regular tax slab rates. However, if one sells the bonds after the lock-in period and before maturity, the gains will be taxable.

A Brief Comparison with Other Forms of Gold

Sovereign Gold Bonds Comparison Chart
Sovereign Gold Bonds compared with other forms of gold investments
(Click to view enlarged image)

Let’s consider a quick example

Say Sita and Gita invested Rs. 2 lakhs each in SGBs and gold bars respectively. At the end of 8 years, Sita will not only have received the current value of gold, but she would have also earned interest over the entire period. Moreover, in case she now wants to buy gold jewellery, there will be no additional charges to convert gold bars into jewellery. Gita on the other hand, would not have earned as much and would have spent additionally on keeping the gold bars safe in a locker, or run the risk of theft by keeping it at home.

The Bottom-line

It is clear from the example as well as the comparison chart that sovereign gold bonds outshine the other forms of investments in gold. There is a bigger question here though. If you were to ask me whether one should invest in gold at all or not, I would say that gold isn’t essential for a well-rounded investment portfolio.

While gold does beat inflation to a certain extent, and can act as a good hedge against it, rising gold prices merely give an illusion that the returns are good. For instance, over a 40-year period, from 1981 to 2021, the price of gold has gone up 29 times (from Rs.1,800 to Rs.48,720 per 10 grams). Whereas, over the same period, the stock market (Sensex) has gone up 338 times, from 173 points to 49,509 points!

A bit of diversification is all that investing in gold offers. This too must be restricted to a maximum of 5% of your total investments. And picking SGBs over physical gold is the smarter move.

Author Bio - Komal Shivdasani

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