Introduction

Sovereign gold bonds are the best alternative to buying physical gold, and we will find out more about them in today’s blog.

Gold has always been the go-to investment for every Indian household. First salary: buy something small in gold. You got a bonus; let’s invest that in some gold scheme (shaadi pe kaam aaayega). This has been the story for ages, but is it true that buying gold coins, gold jewellery, or physical gold, for that matter, is the right choice of investment?

There is no doubt to ascertain that gold is definitely a hot commodity that has been appreciating on a steady basis over the past few years, and this has been the solid reason why the RBI has come with government security bonds that tallies around gold.

What are Sovereign Gold Bonds?

Sovereign Gold Bonds, or SGBs, were introduced in 2015 and have been the talk of town ever since. The securities have been launched in series, and February 16, 2024, witnessed the series IV launch for the financial year 2023-2024. 

Now, the question arises: what is this, and how do we buy it? The denomination of the SGBs is in grams. The maximum limit on what an individual can buy comes up to a whopping 4kg. 

The people who are eligible to buy SGBs are individuals( you and me), Hindu undivided families, and trusts. The trusts and other such institutions declared by the government can hold up to a maximum limit of 20kg. 

The per-gram investment rate is decided by the bullion association, and this time it is Rs. 6,263 for each gram of gold. One can buy these from intermediary banks (private and public), post offices, etc. by following easy steps. 

How SGBs Work?

Say you buy 10 grams of gold, and the RBI or the government wholeheartedly takes in your money and gives a certificate against what you paid. There you go; you are now a proud owner of the bonds worth 10 grams of gold. The promissory note that entails your ownership is going to reach you 7 days after the last day of subscription. 

It seems like a simple affair, right? And believe me, it is. The security that the government offers is a lot better than the 10 grams of gold that stay in the bank locker. The icing on the cake is that you get a good 2.5% interest rate on your bond, which is paid semi-annually. 

Now, you may be thinking, If it offers such great benefits, then why are these security bonds the current trend in the market? Yes, here comes the catch of a lock-in period of eight years. The gold bonds have a mandatory untouchable period of eight years, and during this time period, you cannot even think of withdrawing the bonds and encashing them. 

Yet again, there is a slight leniency in striking the bond from the fifth year, which is based on the interest payment dates. And you get the gold withdrawal rate and what the commodity values are at the end of the 8 year period. 

More than the lock in period trauma, Indians cannot trust gold as an investment unless and until they feel it right under their fingers. This is the major reason why SGBs are still looked down upon. 

For the common investor crowd reading this, please know that the safe locker in which you have placed your gold ornaments offers nothing if and when fate brings in a bank robbery. So, why take the chance?

The answer to this might be that we can just pawn it when we need money immediately, and, fair enough, this makes a valid point. Immediate liquidity is not something that an 8-year lock-in period offers. 

Apart from being available for immediate sale or pawning, an investment should always make sense as an investment, right? When you are buying gold ornaments, you are giving a good amount as the making charge, and how does this even make any sense? On top of this, an amount of tax is also burdened upon you.

Do you think you will be able to get all of this while selling? Well, then best of luck!

Investing in SGBs not only brings around semi-annual interest appreciation and the price of 999 purity gold at the end of 8 years but also helps in getting a tax exemption (if held till maturity), lowers the risk of storage, and the redemption amount is directly linked to the gold price and is easily tradable and transferable. 

Let’s say I have invested 1 lakh, both in SGBs and physical gold. Considering the factors that affect physical gold, like tax rates, making charges, etc., it promptly shows that investing in SGB is beneficial and brings in better returns, as close as 42%*.

This, in short, simply shows what a normal physical gold investor is missing out on. Why waste almost 42% returns for no good reason?

Now, if we are to consider the volatility of gold as a commodity,. There have been circumstances in 1981 where it took a toll and had some time to rally back into its old prestigious self. But, then, I would still say that, among all the other financial instruments you can invest in, investing in gold is still a great choice that will help maintain or even grace up beyond your calculation. So, is investing in SGBs. 

Gold bonds are not just an Indian government thing; there are other countries like Turkey, Germany, etc. that are following similar terms and conditions as Indian SGBs.

Conclusion

There is an honest chance of every mother raising the question, Okay, now that you have become such a careful investor, will tying the promissory notes around you during the wedding ritual be enough? That’s going to be quite a vision!

No, it’s going to definitely look odd, so a small share can be invested in buying good designed ornaments, and this also makes sure that the physical gold sellers don’t lose their grip. But let’s be prudent and invest our money wisely. 

*Footnote: The above consideration is based on the back of the envelope calculations and on the assumption that there is far less GST intervention and no interference with respect to the place of purchase of physical gold in India.