Mr. Prathamesh Mallya, AVP- Research, Non-Agri Commodities and Currencies, Angel One Ltd
Call it tradition or an intelligent investment tactic, the festive season in India has always been linked with massive purchases of the yellow metal. Besides being considered auspicious, gold has traditionally worked as one of the safest investment alternatives. Since 2016, the price of gold has almost doubled, thereby providing an annualised return of close to 11% with the year 2020 witnessing a return of close to 30%. A few decades ago, bullion and jewellery were the only two popular options for buying gold, but with time, there are many other options available wherein an investor could easily invest in gold without needing to hold it physically. One of such options is Sovereign Gold Bonds.
Here is a discussion that can help an investor decide between Sovereign Gold Bonds and physical gold purchases on this festive season.
What are Sovereign Gold Bonds
SGBs were introduced in the year 2015 as a derivative of gold value. These bonds are backed by the Indian Government and issued by the RBI in various tranches during a financial year. These bonds are flexible, and the valuation starts from the equivalent of 1 gram of gold price. Investors could transact in these bonds through trading accounts, agents, selected banks, post offices, or stock exchanges. An investor could purchase a minimum of one unit (one gram), and the maximum investment can go up to 4 kilograms.
Investment in SGBs is flexible and convenient
As described before, SGBs are sold by several vendors through various platforms. It can be held as part of an investment corpus and be gifted to friends and family members. Hence, if an investor is looking to buy small quantities of gold as a ‘Dhanteras Shagun’, SGBs could prove to be the best alternative. Therefore, rather than planning the investments as per the options of jewellery or bullion available with a vendor, an investor could quickly fix the amount of money required to be invested in this option. These bonds are held in a Demat format, and hence there is no threat of physical theft.
SGBs eliminate chances of adulteration-related issues and ‘making charges’
India’s love affair with gold is no secret as the country is one of the largest importers of physical gold. However, an investor is often worried about the quality of gold due to adulteration practice. Such an incident with an investor could mean that a significant investment could be wasted if they are not vigilant enough. However, with SGBs, the chances of such issues are eliminated. An investor could be rest-assured about the value of an investment and capital appreciation thereof. Investment in these bonds is free from making charges otherwise paid by an investor to the buyer whilst taking physical delivery of jewellery or any other bullion.
Tax benefits on SGBs and fixed interest rate of appreciation
The total tenure of these bonds is eight years. If the investor holds these bonds for the entire term, they are exempted from long-term capital gains. However, there is a lock-in period of five years on the sale of these bonds. Besides this, these bonds earn a fixed rate of interest @ 2.5% per annum paid semi-annually.
Avoiding the market rush during the pandemic by investing in Sovereign Gold Bonds
Even though the festive season is incomplete without huge crowds in markets, the current situation is quite different from the past few years as Covid-19 has not completely subsided. As a health-conscious investor looking to break the chain of virus transmission, avoiding markets with huge crowds shall be an excellent practice to follow. Hence, to ensure that the Dhanteras festivities are not affected, and gold purchase goes on without needing to visit crowded markets, SGBs would be the best option.
Possibility of systematic investments in Sovereign Gold Bonds
An investor could also go for systematic investments in SGBs by starting the investment journey from the Dhanteras festival. This practice will help in the diversification of portfolios, and the investor could put small amounts in these bonds based on their financial planning.
SGBs have made investment more accessible, flexible and convenient. It provides liquidity to the investors. Furthermore, there are various vendors and many platforms through which it is distributed. With an investor looking forward to putting any amount of money in gold on the Dhanteras festival, SGBs could be an excellent option. Even though carrying out an online transaction might not give the ‘joy’ of owning a piece of jewellery or bullion, it could be a better option than buying physical gold if investment perspective is considered. Moreover, since the pandemic is not yet entirely over, avoiding crowds and still buying gold could be possible through this investment option.