“If you want an alternative currency, check out gold. It has stood the test of thousands of years as a store of value and medium of exchange.” – Paul Singer
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 Government of India.
What is Sovereign Gold Bond?
Pros of SGBs:
– Backed by the Government of India, so they are considered safe investments.– Offer an annual interest of 2.5% paid semi-annually on the nominal value.– Capital gains from SGBs if held till maturity are tax-free.
– You can get the market value of gold without holding it physically.– Sovereign guarantee on bonds assuring safety of invested capital.
Cons of SGBs:
– Interest earned is taxable.– Subject to fluctuation in gold prices. If prices fall, the value of your investment also falls.– Limited liquidity as they are not freely tradable in the secondary market.– Long lock-in period of 5-8 years. Penalty to exit before maturity.
SGBs can be a good addition to an investor's portfolio looking for diversification with an asset class linked to gold prices. However, the lock-in period should be considered.
SGBs are a good option for long-term investors who want exposure to gold without holding it physically. However, returns are linked to gold price movement.
Overall, SGBs deserve consideration for low-risk investors seeking moderate growth with a gold-linked asset class in their portfolio. But higher returns could be potentially found elsewhere.