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Sovereign Gold Bonds

All About Sovereign Gold Bonds As A Smart Investment Option

Gold has always been a popular investment option for Indian investors due to its timeless allure. It's said that "gold is gold" for a reason. Did you know that gold also has the potential to serve as an excellent inflation hedge? By investing in gold, you can safeguard your wealth from the negative effects of inflation, economic shocks, currency fluctuations, and geopolitical shifts. But is investing in actual gold still a good idea amidst today's ever-changing financial scene?

While adding gold to an investment portfolio can bring diversity, value storage, and inflation protection, investing in actual gold poses its own issues. Storage fees and security hazards can make investing in gold costly. Gold bars and coins can be expensive and require storage in a secure location or a safe deposit box. Additionally, gold is physically prone to theft, raising security concerns.

Therefore, it's worth considering alternative ways to invest in gold. Sovereign Gold Bonds (SGBs) are an investment option you may want to explore. Explore this article to know more:

What is a Sovereign Gold Bond?

Backed by the Government of India, SGBs are available in grams of gold and effectively cover for possessing physical gold. Investors can invest in SGBs when they are available for subscription. To calculate the cost, you can use the simple average closing price of 999 purity gold for the last three business days before the subscription period. This price is made public by the Indian Bullion and Jewellers Association Limited (IBJA).

Gold Sovereign Bonds (SGBs) have a fixed coupon rate of 2.50% p.a. and a maturity period of 8 years. In fact, investors of the first-ever sovereign gold bond tranche 1 earned a capital appreciation of over 10% in 8 years and a 2.50% annual coupon rate. (Source - The Economic Times).

What are the advantages of investing in SGBs?

  • Diversification

Gold’s stability in the investment market can largely be denoted by its minimal correlation with any other asset class. This is one of the reasons why fluctuations in the valuation of other assets don’t greatly affect gold, making it a safer choice of investment. For generations, it has held the place of the highest standard when it comes to storing value, and hence, investing in it via SGBs helps preserve wealth in the long term.

  • Capital Appreciation

It is well known that when the markets go haywire and fluctuate, many investors look at gold to be an asset that can offer safety and security. The age-old wisdom testifies that the value of gold has seen chiefly an upward trajectory in the long term and helped investors appreciate their capital with it. Therefore, including SGBs in the portfolio can be a thoughtful, contemporary way of increasing wealth in the long run.

  • Hedge Against Inflation

Gold’s property steadily becomes more valuable with time, making it an intelligent tool to hedge against inflation. This attribute gains more prominence in the case of investing in SGB as investors avail a fixed interest rate on their investments. Together, these features of SGB make its returns most likely to beat inflation and even the traditional avenues of investments like FDs.

  • Safety

SGB is issued by the Reserve Bank Of India on behalf of the Indian government, which makes it one of the safest investment options. The risk is usually associated with the fluctuations in gold prices only as the chance of defaulting on repayment is next to never, being a government-backed investment instrument. Moreover, there are numerous other benefits of possessing digital gold, as it liberates one from the doubts and fears of purity, storage and security, nullifying the costs one needs to bear in transacting with physical gold.

  • Loans Against SGB

SGBs are also known for being a great collateral for bank loans and loans from NBFCs, which is a major favourable attribute in our newfound credit-based economy. It features the same value and follows the same guidelines set by RBI for getting loans sanctioned against physical gold. However, one must remember that whether a bank or lending institution wants to grant a loan against SGBs depends solely on the decision of the respective bank or agency.

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer-related documents carefully.

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