How safe is investment in gold bond?

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The current economic situation is precarious. Thus, for wealth creation, an asset with minimal risks and the greatest benefits is ideal. Gold is a tangible, inflation-resistant, flexible asset with excellent liquidity. Thus, it is an ideal investment option for almost everyone, especially ‘newbies.’ But gold is also volatile. It is a physical asset that you must store in a locker. Also, do you know that investing in gold coins might not fetch you favourable returns like the SGB? How? Let us find out!

It’s a good thought if you want to invest in gold. But concerns about the storage of physical gold are genuine. Hence, in today’s hustle culture, Sovereign Gold Bonds (SGB) are your best friend. Sovereign Gold Bonds are Government Securities bonds that the RBI can issue in India. These gold bonds help you capture changes in an asset’s price (here, gold). Likewise, you also get a fixed interest income like what you get from your fixed deposits in a bank.

Do you want to know the possibilities a gold bond holds for you? If yes, then read ahead!

What is a Sovereign Gold Bond?

Simply put, a Sovereign Gold Bond is a government security (G-Sec) issued by the Reserve Bank of India. You get a fixed income due to the gold interest. It’s generated twice a year. In addition, you also receive the redemption of cash units on the maturity of the gold bond. A Sovereign Gold Bond has gold as its denominator. So, you can invest in multiples of 1 gram of gold. Thus, the smallest investment in a gold bond is 1 gram. According to RBI, each investor can only buy SGbs of 4kgs per Financial Year.

In other words, the premise of a gold bond is that the RBI issues you units of gold in grams. You then receive an assured return for the units of gold you paid for. SGBs are allocated via banks, brokers, post offices, and online platforms. Yet, they are available for buy only at specific times of the year, usually from October to March.

The interest for gold bonds is around 2.50% per annum. You can pay. Furthermore, the tenure of an SGB is eight years. You can also exit from the interest payment dates in the fifth, 6th, and 7th years.

The Indian government launched the Sovereign Gold Bond Scheme under the Gold Monetization Scheme. The scheme is an alternative to purchasing physical gold. The SGB scheme is less risky, convenient, and held in a Demat format. Sovereign Gold Bonds provide more benefits vis-à-vis physical gold or Gold ETFs, such as –

  • A semi-annual extra interest rate of 2.5%
  • No making charges when compared to gold coins and jewellery
  • Less or zero maintenance cost
  • Great safety
  • It’s perfect for people wanting minimal risks and maximum returns.

Now that we know the basics of the SGB let us see if it is the proper investment bond for you.

Is a Sovereign Gold Bond the right investment option for you?

Many market expert believes that in today’s Indian Market scenario, investing in Sovereign Gold Bonds is optimal. SGBs are a pretty profitable investment scheme. They are perfect for many people as they have many advantages and fewer restrictions.

  • If you have a low-risk appetite and want to focus on the safety of your investment, but are looking for a large return, then an SGB might be your best bet.
  • Investors looking to diversify their investment portfolio can opt for gold bonds.
  • Individuals who want to buy gold for investment purposes, not preservation value, should consider Sovereign Gold Bonds instead of physical gold.
  • People looking to earn a regular passive income from their investment should purchase gold bonds.

After discussing the many aspects of an SGB, let us answer the looming question about the safety of gold bonds.

How safe is it to invest in a Gold Bond?

Gold investment bonds are one of the safest investment options in the current market. Priced at INR 5198/gm at the time of writing, gold bonds have increased in value by 99%. Moreover, as the government issues a gold bond, its credit risk is zero.

However, there is an inherent risk of loss if the market price of gold falls below its cost price. But, it is not an SGB-specific risk. It is a risk applicable to any form of investment. The best part is that the Reserve Bank of India assures that you will never lose the quantity of gold that was allotted to you as an investor.

You can get returns from gold bonds in two ways –

1. Capital appreciation, as the bond price and gold price are linked

2. As regular interest income

Furthermore, gold bonds have a ready market. You can trade them at the prevailing prices without any hassle. There is no transaction cost to exit from the scheme. Moreover, you receive cost savings in other ways, such as the absence of storage expenditure, insurance for loss or theft, etc.

Additionally, the Sovereign Gold Scheme offers an exemption from capital gains tax during maturity. So, it becomes way more profitable to investors. Lastly, you can use Sovereign Gold Bonds as collateral for loans from banks, financial institutions, and more.

Wrapping It Up!

In a nutshell, the risks associated with Sovereign Gold Bonds are minimal. But, like any other asset in the market, no investment promises a risk-free return. Hence, you should check your investment preferences and the scheme details before opting for a gold investment bond.

Lastly, if you want to know more about SGBs and other investment instruments, visit the Piramal Finance website. It will help you know their products and services, especially credit cards and personal loans.