Gold is a huge deal in India. – We don’t view it as jewelry, but as a part of our culture.
I’ve tried many times to convince my dad to put money into stocks. But he always says the same thing: gold. Perhaps he doesn’t believe in my stock picks. Or maybe he cannot look beyond gold. You know what I mean, right?
But their affinity towards gold isn’t just about showing off or looking prosperous.
It is about trust.
Gold has always been a good investment. For example, in 1950, 10 grams of gold cost ₹99.
Today, in 2024, it costs around ₹74,000. If we calculate it, that’s roughly 9.35% returns over 75 years. I know, I know, inflation’s a thing, but that’s exactly the point. Gold isn’t for aggressive growth—it’s there to protect you. It’s a safety net for those “bad times.”
So, yeah, maybe our dads were right about gold, but here’s the thing—they might not be right about how they invest in it. Gold as an investment has its challenges. But Sovereign Gold Bonds (SGBs) offer a great alternative. They provide the benefits of owning gold without the hassle.
In this blog, we’ll explore what SGBs are, why they’re better than physical gold, and how they can help you diversify your portfolio.
What Are Sovereign Gold Bonds (SGBs)?
So, let’s understand Sovereign Gold Bonds, or SGBs for short. The first time SGBs entered the market was back in November 2015.
Since then, one would find that it has been one of the top most alternatives to invest in gold. To this date, the total value of SGBs with investors in India is about 72 thousand crores. That’s not a small number, is it?
The bonds are issued by the Reserve Bank of India on behalf of the government.
It means you can invest in gold, without actually buying gold. The units bought would appear in the books of the RBI.
They are named ‘bonds’ because they work just like them, the only difference being that their value is tied to gold and not cash. And since they are backed by the government, there is a negligible chance of a default.
Now, how do they actually work?
So, the values of SGBs are in units. One unit of SGB is the price of one gram of gold. Gold market price fluctuates from day to day. So, based on that, bond prices also vary. Whenever you purchase these from the stock exchange, the price paid by you is the present value of that bond on that particular day.
Similarly, at the time of redeeming bonds, you get the market price on that particular day. The bonds have a fixed maturity period of 8 years, but they are redeemable after 5 years.
But the fun part is that SGBs pay 2.5% interest on a half-yearly basis, unlike regular bonds.
And if you keep holding them till maturity, then the capital gains earned on those aren’t taxed. You will be taxed according to your tax slab on the interest payable. But still, it is a good deal.
Later, we shall discuss how we can purchase these bonds.
Benefits of SGBs in Your Portfolio
Let’s see why SGBs are such a smart investment. If we’re spending time understanding this, there must be some real benefits, right? Otherwise, we’d stick with the usual options. So, what makes SGBs stand out?
1. Hedge Against Inflation
Gold has always been a solid bet when inflation spikes. SGBs give you that same benefit. Gold usually holds up well during economic uncertainty, adding stability to your portfolio. It acts as a cushion in a bear market or even during a market crash.
2. Security
No need to stress about gold’s purity or whether your dealer is trustworthy. SGBs are backed by the government, so you’re essentially holding gold of 999 purity without worrying about hallmarks or shady dealers. Peace of mind is guaranteed.
3. Storage
Physical gold comes with a lot of hassle—mainly, where do you store it safely? At home, it’s risky. In a bank locker, you’re looking at extra costs, and if something goes wrong, banks only compensate up to 100 times your locker rent. With SGBs, storage isn’t an issue at all—it’s digital, and there are no risks or additional fees.
4. No Extra Charges
When you buy gold jewelry, there are making charges, storage costs, and GST. With SGBs, you skip all that. No making charges, and since it’s not physical gold, no locker fees. You only pay a small GST on the brokerage fee, but that’s a tiny amount compared to what you save.
5. Passive Income
Unlike physical gold, SGBs give you more than just price appreciation. You also earn 2.5% interest yearly, paid semi-annually. It may not sound like much, but over time, this can compound into a nice source of passive income, all while your gold’s value grows.
6. Tax Benefits
We have discussed this earlier, but let’s see this again. If you hold your SGBs till maturity, any capital gains are completely tax-free. That is a huge advantage over buying physical gold, as you have to pay tax on the capital gains while selling physical gold.
7. Use as Collateral
SGBs are recognized by banks and other financial institutions. If you need funds urgently, you can use SGBs as collateral and take loans. It can act as financial support at times when you have a shortage of funds to meet any short-term liability.
How Much of Your Portfolio Should You Invest?
Having discussed some of the advantages of SGBs, it is time to consider how best to fit them into your overall investment portfolio.
It is worth noting that, although SGBs are relatively good investments, the stakes should not be placed all at once. After all, ‘low risk’ comes with ‘low returns’. This again calls for diversification.
I won’t bore you with Warren Buffet’s quotes on diversification—although he has plenty of those too—but let’s just say it’s the best strategy for managing risk. It ensures that if there is a sudden upsurge in the market, your portfolio will remain well-balanced so that you don’t take huge risks with sudden shocks in the market.
Though you can experiment in the short run, long-term investors need to design their portfolios very carefully to get the highest returns with the lowest risk.
Again, I cannot quote the exact percentage of how much SGBs should constitute your portfolio as every individual is different, but I can give you a rough idea, so let’s look at factors while designing your portfolio.
Conservative Investors
For conservative investors, you could put 10% to 15% of your investments in SGBs. That will act as a cushion, especially when the market goes ballistic. Here, your gold acts as your cushion, balancing the risks of your equity investments and keeping the portfolio steady.
Moderate Investors
For the middle category, a 5% to 10% allocation would be ideal for SGBs. As mentioned earlier, you would have all the benefits offered by the safety gold provides without forking over the entire growth potential of the riskier assets, such as equities.
Aggressive Investors
As a higher-risk-taker, higher-rewarder, you should hold your SGB portion to 5% or less. Your focus will be more on high-yielding investments, such as equities, and then your SGBs will just mildly hedge you, just a bit to check the riskier portions without compromising your potential gains.
Key Considerations for Portfolio Allocation
Your Goals
The top benefit of SGBs is that they save your wealth and keep you abreast of inflation. This is not a method to generate high returns or meet humongous corpus targets. So if you aim to build a fortune out of SGBs, you will be disappointed.
Age
Your age is a significant determinant of how much you should invest in SGBs. Younger investors can afford to take a lot of risks so their allocation in SGB should be less. The reason is simple: younger investors have ample time to regain their lost fortunes when the market goes down. Older investors, on the other hand, might prefer a safer route, making SGBs a better fit for a larger share of their portfolio.
Market Conditions
If the economy appears unstable, you may want to up your SGB allocation. Generally, gold shines when people are nervous about the state of the economy. That’s a pretty good way to level out your losses in riskier investments. Monitor gold prices, too. If the price is high, you may not want to invest as much as you otherwise would, and vice versa.
Existing Gold Investments
Of course, we are talking about SGBs, but if you are already holding physical gold or ETFs, you should factor that in. If you are very much invested in gold, then you can look to get back the money in your SGBs.
Now you have a general idea of how much you should invest in SGBs.
Risks and Considerations
While SGBs have many plus points, like any investment, they also come with certain associated risks and constraints that you must consider:
1. Capital risk
As with all gold-related investments, SGBs are exposed to the risk of falling gold prices. In case the price drops in gold, then your bonds will fall along with it. Of course, this is something that happens with every investment.
With its history of stability and reliability, gold is an asset for maintaining the balance in the market; hence, there is less risk, and if the investors are long-term players, they are likely not to lose much if they can hold up till the fluctuations in the market.
2. Lock-in Period
One of the biggest negatives of SGBs is that they’re locked in for 8 years. Although you can redeem after 5 years, it still makes it a long-term commitment. SGBs are better suited to long-term goals, such as retirement, children’s education, or marriage.
The shorter-term or even medium-term returns require looking at something else in this case. Ensure that you are fine with locking up your investment for a considerable time before you invest.
3. Low Liquidity
There is also the problem of low liquidity of the SGBs.
Yes, you can trade them on the secondary market but they aren’t as liquid as other assets like stocks or gold ETFs. If you are one of those high-frequency traders, then you might feel that the SGB is a bit of a restriction.
4. Investment Limitation
There is also an investment cap one can make in SGBs.
One can only invest a maximum of 4 kg of gold annually using SGBs, which comes to around ₹3.1 crores. That should be pretty good for most of the investors, but obviously, it might affect HNI investors in terms of SGB investments if they are looking to dedicate more of their wealth to gold.
How to Purchase SGBs?
Let us now find out the ways through which one can purchase SGBs.
The minimum amount of investment that you can make in SGBs is one gram of gold. Generally, any kind of individual or institution is eligible for SGBs. However, it is worth mentioning that NRIs, PIOs, OCIs, or even entities like firms, LLPs, and private limited companies are not eligible to invest in these bonds.
SGBs can be purchased either through primary markets or secondary markets. Let us understand what each one of them means:
Primary Market
This is a platform where bonds are first issued to the public. You can get them from Nationalized Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, or the Stock Holding Corporation of India Ltd. (SHCIL).
There are several options through which you can invest in SGBs in the primary market.
You may submit your application through your bank’s e-banking or mobile banking facility. For a more direct approach, you may even invest directly from the website ‘RBI Retail Direct‘.
Alternatively, you can simply walk into your nearest bank branch or post office and submit SGB application form available there. Apart from all these, the Stock Holding Corporation of India Limited, or SHCIL, also facilitates investing in SGBs.
E-Banking Online Application Procedure:
- Log in to your bank’s Internet banking or mobile banking account
- Avail the facility of ‘Services’ and click on ‘Sovereign Gold Bonds.’
- Go through the terms and conditions and accept those
- Fill the form with details of bonds to be applied for and other nominee details
- Complete the payment using your preferred mode.
Applying Offline:
- Visit the nearest post office and apply for Sovereign Gold Bonds along with the application form.
- Fill this form strictly as illustrated and attach other required documents along with it.
- Payment can be made through a cheque or demand draft.
- You will get an acknowledgment receipt after verification of your application.
The Certificate of Holding will be issued on the date of SGB issuance. It can be collected from banks, SHCIL offices, post offices, designated stock exchanges, or directly from RBI via email if provided in the application form.
Secondary Market
Sovereign Gold Bonds (SGBs) can be bought on authorized stock exchanges either directly or through agents. Like other assets, SGB prices fluctuate based on demand and supply, and they are generally lower than the issue price in the secondary market.
Since I use Groww, I’ll guide you on how to purchase SGBs from the secondary market through a broker. You can apply the same steps with whichever broker you use.
Steps:
- Log in to your broker account and search for SGBs using the search panel.
- You will see a list of different SGB series issued on different dates, each redeemable on specific dates. Every SGB trades at a different price depending on the demand and supply for that series.
3. Select any of the series to buy or sell units of that bond. You will be able to see the chart for that bond along with the per-unit value, which equals 1 gram of gold.
4. On the right side, you’ll likely find the buy/sell window. Enter the quantity you want to trade and choose either the market price or the limit price. Since the number of sellers is usually low, it can be difficult to execute trades at the limit price. Market price is generally more suitable for SGBs (note that only delivery trade is possible here; intraday trading is not allowed).
5. After entering the quantity, submit the buy/sell order. It will be executed after some time.
That’s how it works on Groww. You can explore your broking app to find a similar process. It’s usually not very complicated!
Current Update on SGBs
The RBI issues Sovereign Gold Bonds (SGBs) every quarter. Till a few years ago, it used to release more than ten tranches in a year, but this seems to have changed lately. So far, the RBI has issued hardly four tranches in the last two years each. Interestingly, to date, in 2024, the RBI has not issued even a single tranche of SGBs, and investors have been left with a sense of unease in their minds.
One reason for this halt is that gold prices have seen a spectacular rise over the past couple of years.
It is into stable gold prices that the RBI wishes to have itself, and this may be one of the reasons that the issuance of bonds has been so slim. For starters, it was well within the budget of the government to offer SGBs at 2.5% when compared to other bonds fetching returns as high as 7-8%.
However, as the gold prices zoomed, liability on the old bonds of the government increased manifold, and therefore 2.5% interest became more burdensome to the government.
According to experts, there will be only one set of SGBs in the year that will hit markets around Diwali.
By default, SGBs are sold off at lower values in secondary markets owing to low demand. However, currently, the SGBs are available at more than 15% premium on account of unprecedented demand and no new issues in the calendar year 2024.
Under these circumstances, it would not be a good time to buy SGBs from stock exchanges. Anybody who wants to put some money in SGBs would do well to postpone his investments or get other gold products like gold ETFs or gold mutual funds.
Conclusion
Now that you know the nitty-gritty of Sovereign Gold Bonds or SGBs, we hope you understand everything from their structure to their advantages and disadvantages. Needless to say, a diversified portfolio is the only way to cut down on risks and increase returns.
SGBs offer you a safe and lucrative option to invest in gold, which enables the interest from the asset without its downsides. They contribute to the preservation of wealth and provide attractive interest income.
If you share my father’s sentiment that holding gold provides more satisfaction than mere pieces of paper, that’s perfectly valid. Sometimes, investment decisions are tied to emotional satisfaction rather than financial logic. However, if you prioritize financial growth, SGBs outperform physical gold significantly.
Ultimately, no single investment suits every individual’s needs. Yet, considering the tax benefits, government backing, and interest payments associated with SGBs, they stand out as one of the best avenues for diversifying your investment portfolio with gold.
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