The Reserve Bank has recently introduced the Sovereign Gold Bond Scheme 2023-24 Series 1, which will be available for investment until June 23.
What does the scheme offer?
The Sovereign Gold Bond (SGB) scheme allows investors to track the price of one gram of gold. Under this scheme, each bond requires an investment of Rs 5,926.
However, investors who opt for digital payment methods will receive a discount of Rs 50 per gram, resulting in an issue price of Rs 5,876.
Additionally, investors will earn an annual interest of 2.5% on their Sovereign Gold Bonds, with interest payments made every six months.
Sovereign Gold Bonds have an eight-year tenure and are listed on stock exchanges, allowing investors to trade them.
After five years, investors can redeem their bonds directly from the Reserve Bank.
These bonds provide returns based on the prevailing price of one gram of gold at the time of maturity.
Moreover, interest is paid on the bond’s cost during issuance.
Consequently, Sovereign Gold Bonds present a favorable option for gold investments.
What are the advantages?
Investing in Sovereign Gold Bonds eliminates the challenges associated with physical gold, such as the risk of theft or the need for secure storage.
Parul Maheshwari, a certified financial planner based in Mumbai, points out that unlike mutual funds, there are no asset management fees associated with Sovereign Gold Bonds.
Furthermore, the government provides a 2.5% interest rate on these bonds.
Additionally, investing in Sovereign Gold Bonds can offer tax benefits.
While the interest earned is subject to income tax according to the applicable slab rate, long-term investors can enjoy post-tax returns.
Abhishek Soni, CEO of the income tax return filing portal Tax2Win, explains that if an investor holds Sovereign Gold Bonds for more than three years, they will be subject to a long-term capital gains tax with indexation at a rate of 20%.
Without indexation, the tax rate is 10%. Returns from Sovereign Gold Bonds remain tax-free until maturity,
making them an attractive option for long-term investors interested in gold investments.
What are the challenges?
Although Sovereign Gold Bonds are listed on various exchanges, their trading prices often deviate from their fair value due to fluctuations in gold prices.
Investors who wish to exit early may encounter difficulties in redeeming their Sovereign Gold Bonds at a reasonable price on the exchanges.
Should you invest?
According to Manish Jeloka, co-head of products and solutions at wealth management firm Sanctum Wealth, gold investment holds promise for the medium and long term.
Jeloka suggests that when signs of a recession appear in the US and other global markets, gold prices tend to rally.
Thus, it is an opportune time to allocate a portion of your investment towards gold.
Ravindra Rao, vice-president of commodity research at Kotak Securities,
believes that the era of aggressive interest rate hikes is coming to an end, indicating that gold prices are likely to remain bullish in the coming years.
Factors such as increased buying by central banks, rising geopolitical tensions,
and uncertainty over global growth contribute to the positive outlook for gold.
With central banks around the world raising interest rates to control inflation, economic growth has been slowing down.
This situation may lead central banks to reconsider their monetary policies, making gold investments more appealing.
Furthermore, it is important to view gold not only in terms of returns but also as a safeguard against stock portfolio risks.
Jeloka advises that since Sovereign Gold Bonds are long-term investments with an eight-year duration,
investors should only allocate an amount they can afford to wait for. While these bonds can be sold on
