Sovereign Gold Bonds – What You Need to Know Before Investing!

By Kishore Sabareeshan | November 8, 2018

All that glitters is gold, but that doesn’t mean you should hope for all your gold investments to shine! Here’s what you need to know before you invest in sovereign gold bonds.

What are sovereign gold bonds?

Sovereign Gold Bonds or SGBs are a means to own gold not for the sake of consumption but purely for investment. Here, you are handed the ownership of gold in the form of paper and not physical gold per se. In effect, you will be earning or losing off the gold market wave in relation to price.

Additional Reading: Different Ways to Invest in Gold

Why SGBs over actual gold?

Unlike physical gold, SGBs are tax exempt, which means more benefits for the investor. Secondly, physical gold usually comes at a premium cost, whereas the value of these bonds is closer to the actual price of gold.

Another point that gives SGBs brownie points is that it doesn’t come with the downsides that physical gold brings to the table. For example, jewellery designs can become outdated and out of fashion in a matter of days, so the value of a piece of jewellery can dwindle at any given time. Oh, and don’t forget about the making charges that are involved in gold jewellery. That’s a cost you don’t need to worry about when you choose Sovereign Gold Bonds.

Now that you’ve understood how Sovereign Gold Bonds are different from physical gold investments, here are some things you may want to keep in mind before getting your investment game kick-started.

Availability of SGBs

The government opens a window to sell fresh SGBs every two to three months. This window remains open for a week, so you need to plan your investments according to this schedule. This is something you need to keep in mind before you get started with SGBs.

Additional Reading: Two Minute Guide: Tax On Your Gold

5-year lock-in period

SGBs have a lock-in period of five years; you can only exit post that, so keep in mind that your investment plan must be at least five years long. It makes sense to channel all your long-term investment goals towards SGBs as opposed to short ones.

How it accumulates

The accumulating is pretty similar to the SIP system you see in Mutual Funds, except for one minor difference; SIP units can be redeemed as per your need whereas SGB units can be redeemed only post 5 years.

Additional Reading: Still Confused About SIP Investment? A Guide To Help You Sail Through

Nature of returns

Since SGBs are linked to the market, it totally depends on the gold rates at the time of maturity. Given that the lifetime of SGBs is eight years, you should walk away with a decent stash of investment by the end of your investment period; way better than owning physical gold for eight years and not getting much value for it later on, don’t you agree?

Secondary market scope

Transactions in the secondary market may or may not result in gains, because there may not be enough buyers to purchase the quantity you’re selling. Additionally, liquidity and price can greatly affect your transaction here.

The final word on Sovereign Gold Bonds

Experts suggest that your decision should be based on your desired outcome. If you’re looking to meet a financial objective, then you should not allocate more than 10% of your investment portfolio towards SGBs.

On the other hand, if you’re looking at SGBs as an investment, you can broaden your scope of SGB investments.

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