We all know that our portfolio should be diversified. And gold forms one integral part of any diversified portfolio. Among the various types of gold available, Sovereign Gold Bond (SGB) is the best product to be in your portfolio. In this article, I list 10 Reasons to buy SGB
1. What are Sovereign Gold Bond
Sovereign Gold Bond or SGB as they are popularly called are bonds issued by RBI.
RBI issue the bonds on pre-announced dates. Customers can apply for SGB Bonds basis the prevalent gold market price (3-day average) with a guarantee from RBI to pay back the money after the holding period at the prevalent gold market price (3-day average). Being backed by RBI means they are fully safe and hence SGB has become very popular.
Following is the schedule calendar published by RBI to buy SGB
2. 10 reasons to buy SGB
Following are the 10 reasons to buy SGB
1. Backed by RBI
SGB is issued and backed by the Reserve Bank of India. In simple language, this means that no matter what happens, you will be paid basis the prevalent market price at the time of selling. Unlike other gold forms, there are no risks of gold being stolen, issuing companies going bankrupt, or Gold ETF delisting from the market.
We Indians have a special love for Gold and discounts. SGB is the only gold form where you will get a discount on your purchase.
RBI gives a discount of 50/- per gram if SGB is purchased via online mode. If you look at the current lot (2021-22 Series IV), you will note that buying price is fixed at INR 4807- per gram. But if you buy via online medium, the price will be INR 4757/- per gram.
3. Get Paid for Holding SGB
Yes. You read it right. RBI gives you money for holding your SGB. Historically it has been between 2.5%-2.75% per annum of your total investment. This interest is credited twice a year directly in your bank account.
So if you are holding SGB worth 1 Lakh and RBI is giving you 2.5% interest per annum, you will get a total of 2500/- in your bank account (1250/- deposited every 6 months) for next 8 years (or for the holding period).
Note – This interest is calculated as simple interest and is taxable.
4. No Extra Charges
SGB is the only form of gold that does not levy any extra charges. All other forms of gold levy some form of extra charges over and above the market price.
Physical Gold purchase normally attracts Making Charges (usually between 10-25%), GST (3% both on buying price and making charges) and locker charges. All these combined can cost you between 15-30% extra. So for a gold purchase of 1 Lakh, you might be asked to pay a total of approx 1.15 – 1.30 Lakhs
Digital Gold levy buy-sell spread charges (difference between the buying price and selling price which goes to Paytm pockets – usually about 3%), GST (3%), holding charges (0.04%) and conversion charges (if converted into physical coins after 5 years).
ETF adds annual commissions on their purchase. This is usually around 0.5% of the total holding.
Only RBI is one where you do not have to give any extra charges. In fact, if you account for the online discount as highlighted in point#2, your 1 Lakh of investment in SGB will give you gold worth more than 1 Lakh.
5. No Tax on LTCG
Sovereign Gold Bond is the only form of gold on which Long Term Capital Gain (LTCG) are exempted if we hold them for entire tenure (8 years). That means we do not have to pay any tax on the capital gains we make.
Note – In case you sell between 5 – 8 years, you will have to pay 20% tax as LTCG.
6. Highest Returns
Having SGB in your portfolio is a sure win for you since they offer the highest returns among all gold assets.
In my earlier article comparing returns between Physical Gold, Digital Gold, ETF and SGB, you can see that SGB easily gives the highest return.
Note – From the above-referenced article, You can download the excel template and use it to find gold returns and plan your investments accordingly.
7. Ease of Buying
With plenty of options available to buy SGB, you cannot complain. There are online modes where you can buy via your Demat account or bank account. Offline mode includes Post Office, Bank Branches.
All you have to do is fill in the application and ensure you are KYC compliant. If you meet eligibility criteria and pay money on time, you will get the bond.
8. Can be Used as Collateral
We often see ads where people use their gold jewelry as collateral to take loans. Well, good news! You can also take gold loans by using SGB as collateral.
Since SGBs are very safe and secure, all the banks and lenders accept SGB as collateral.
Each person is allowed to hold up to 4kg of SGB per year. So if you truly love gold and want to have high exposure to it, you can buy SGB for all your family members. This way, you will have ample collateral in time of need.
9. Can be Gifted
Another good reason to buy SGB is that you can gift them. Even to minors! So start gifting SGB for all important occasions and say bye-bye to age-old practice of gifting physical gold.
10. No Headaches
SGB is the only gold asset which does not give you a headache. You do not have to worry about getting low purity gold, gold being stolen or the company holding your gold going bankrupt/their accounts being frozen. Further, SGB is simple to understand, buy and sell. A long holding period of 8 years acts as a barrier for impulsive selling if the price crashes / you need money.
Hope this article was able to convince on why SGB is a good investment and should be an important asset in your portfolio. Your next step should be to apply and get SGB as early as possible. Feel free to share your queries, comments and feedback.
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This Post Has 2 Comments
As usual, very informative article. Thanks Nishant and keep it up
Nice article Nishant. Very informative.
Didnt knew about points 8 and 9. Thanks