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Should You Invest in Sovereign Gold Bonds (SGBs)?
Investing in gold has always been a popular choice among investors. Gold is considered a safe haven asset, and its value has only increased over time. Sovereign Gold Bonds (SGBs) are government securities that provide an alternative investment option to physical gold. In this blog, we will dive deeper into SGBs and help you decide whether it's a suitable investment for you.
What are Sovereign Gold Bonds (SGBs)?
SGBs are government securities denominated in grams of gold that offer a return linked to the prevailing market price of gold. SGBs provide an opportunity to invest in gold without the hassle of storing physical gold. SGBs were launched by the Government of India in 2015, with an aim to reduce the demand for physical gold and shift it to financial savings.
SGBs are issued in tranches by the Reserve Bank of India (RBI). Each tranche has a fixed issue price determined by the average closing price of gold of 999 purity of the previous three business days. The minimum investment in SGBs is one gram, and the maximum investment is 4 kg for individuals, 4 kg for Hindu Undivided Families (HUFs), and 20 kg for trusts and similar entities.
Why to invest in SGBs?
SGBs provide several advantages over physical gold and other investment options. Here are some of the key reasons why investors choose SGBs:
Safety: SGBs are issued by the government and are considered safe investment options. Investors do not have to worry about the security of their investment, as the bonds are held in electronic form by the RBI.
Fixed returns: SGBs provide a fixed interest rate of 2.5% per annum on the amount invested, which is paid semi-annually. Additionally, there's a potential for capital gains if the market price of gold increases.
Liquidity: SGBs can be traded on exchanges, providing liquidity to investors. This means investors can sell their bonds before maturity if they need the money.
Tax benefits: SGBs provide tax benefits to investors. Capital gains arising from the redemption of SGBs are exempt from tax if held till maturity. Moreover, SGBs can be used as collateral for loans.
No making charges: Unlike physical gold, SGBs do not have any making charges. Making charges can range from 6% to 14% of the gold value, which reduces the returns on investment.
How do SGBs work?
SGBs have a tenure of eight years, with an exit option after the fifth year. The bonds can be purchased through banks, designated post offices, or stock exchanges. The investment amount is debited from the investor's bank account, and the bonds are issued in electronic form. The bonds can be transferred to any other eligible investor, and the redemption proceeds are credited to the investor's bank account.
SGBs provide a fixed interest rate of 2.5% per annum on the amount invested, which is paid semi-annually. The interest on SGBs is taxable as per the investor's income tax slab.
The redemption price of SGBs is linked to the prevailing market price of gold. If the market price of gold increases, the redemption price also increases. If the market price of gold decreases, the redemption price decreases. The redemption price is calculated by multiplying the grams of gold in the bond by the average of the closing price of gold of 999 purity for the previous three business days.
Should you invest in SGBs?
While SGBs offer several advantages, they may not be suitable for everyone. Here are some factors to consider before investing in SGBs:Investment horizon: SGBs have a tenure of eight years, with an exit option after the fifth year. If you're looking for a short-term investment option, SGBs may not be the best choice.
Market conditions: SGBs are linked to the market price of gold. If you believe that the price of gold is likely to increase in the future, SGBs may provide good returns. However, if you believe that the price of gold is likely to decrease, you may want to avoid investing in SGBs.
Investment amount: SGBs have a minimum investment amount of one gram, which may not be suitable for all investors. Moreover, the maximum investment limit is 4 kg for individuals, which may not be enough for high net worth individuals or institutions.
Interest rate: The fixed interest rate on SGBs is 2.5% per annum, which may not be as high as other investment options. If you're looking for higher returns, you may want to consider other investment options.
Liquidity needs: While SGBs provide liquidity, the market for SGBs may not be as liquid as other investment options. If you need to sell your bonds before maturity, you may not be able to find a buyer easily.
Another aspect that potential investors may want to consider is the possibility of purchasing SGBs at a discounted price. It's worth noting that SGBs are traded on stock exchanges, and their price may fluctuate based on market conditions. This means that you may be able to purchase SGBs at a discount if the market price of gold falls below the issue price.
How to find SGBs at Discount?
- Go to the SGB Analyzer website at https://sgbanalyzer.com/
- On the homepage, you will see a table that displays the current market price of different SGBs. You can use this table to compare the current market price with the issue price of the bond.
- To find discounted SGBs, click on the "Discount to Issue Price" tab located in the top navigation menu.
- This will take you to a page that displays a list of SGBs that are currently trading at a discount to their issue price. The list is sorted by the highest discount percentage first.
- You can click on the name of each bond to view more details, such as the issue date, maturity date, coupon rate, and discount percentage.
- To further analyze the historical performance of each bond, click on the "View Historical Data" button next to the bond name. This will show you a graph that displays the price movements of the bond over time.
- You can also use the search bar at the top of the page to filter bonds based on specific criteria, such as the maturity date or coupon rate.
- Once you have identified a discounted SGB that meets your investment criteria, you can purchase it through your broker or trading account.
By following these steps, you can use the SGB Analyzer to find discounted SGBs and potentially increase your returns
Conclusion
Sovereign Gold Bonds (SGBs) provide an alternative investment option to physical gold. SGBs offer several advantages, such as safety, fixed returns, liquidity, tax benefits, and no making charges. However, SGBs may not be suitable for everyone. Factors such as investment horizon, market conditions, investment amount, interest rate, and liquidity needs should be considered before investing in SGBs.
If you're considering investing in SGBs, it's important to do your research and understand the risks and rewards involved. Consult with a financial advisor to determine if SGBs are the right investment option for you. As with any investment, it's important to have a diversified portfolio and not rely solely on one investment option.