Should you invest in Sovereign Gold Bonds? • RoboAdviso | Best Blog for Mutual Fund and Investment in India

Should you invest in Sovereign Gold Bonds?

Roboadviso     Asset Allocation,Financial Planning     Posted On, Tue 19th July, 2016     No comments
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Should you invest in Sovereign Gold Bonds?

Sovereign Gold Fund invest

Sovereign Gold Bonds are the safest way to invest in Gold because these bonds are issued by the Government of India. Market sentiments have been uncertain since Brexit, with investors clamoring for hedge-based instruments like Gold. Considering the fact that the prices of Gold are on a three-year high, SGBs are a good opportunity to benefit from Gold appreciation.

Sovereign Gold Bonds are being issued from 18th July to 22nd July’ 2016. You can apply for them at scheduled commercial banks, designated post offices, Stock Holding Corporation of India (SCHIL), National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

The minimum subscription is 1 gram of Gold and the maximum is 500 grams per investor. The SGB issue is priced at Rs. 3,119 per gram

Why opt for Sovereign Gold Bonds?

Compared to regular Gold investment, Sovereign Gold Bonds give you an assured 2.75 percent interest per annum. The interest will be credited on a half-yearly basis (every six months) in the account of the investor. Thus you can benefit from appreciation in asset value and assured interest.

There is no capital gains tax on redemption, though the interest component is taxable. Long-term gains that arise due to transfer of Sovereign Gold Bonds can enjoy indexation benefits.

Please bear in mind that the redemption is 8 years from the date of issue with a lock-in period of 5 years. This means premature redemption is allowed after the fifth year of the issuance of these bonds. The bonds can be converted into a Demat form and used as collateral to apply for loans.

Why did the government introduce Sovereign Gold Bonds?

SGB bonds that are opened for subscription on 18th July is the fourth tranche, through which the government hopes to put a rein on physical Gold that is imported in huge quantities, draining the country’s foreign exchange. So far, according to reports, the government raised Rs. 1.322 crore from the first three tranches. The post Brexit scenario and added features of reduced minimum subscription (earlier it was 2 gram of Gold minimum) and capital gains tax benefit, should help garner a much better response.

Should you invest in Sovereign Gold Bonds?

As an investment option, Sovereign Gold Bonds do have their pitfalls. For one, these bonds have a long lock-in period which prevents the investors from liquidity and capitalizing on intermittent gains. That kind of lock-in period with low returns is not justifiable for an investor, considering you can benefit from much better return on investments in equities and even fixed instruments like small savings, debentures; etc. Further if Gold prices fall within the holding period, there is a possibility of capital loss.

Secondly, while the government has removed capital gains, the fact the measly interest payment is taxable is not good news. Even though the government is trying its best to make people invest in paperless Gold, the country still perceives physical Gold as a traditional adornment item for events like marriages.

From the portfolio perspective, we do not recommend SGB because Gold is not a good investment option. It is only a hedge against financial lows; it just reduces risk during bleak phases. However, such phases do not long, when the market bounces back, Gold begins to lose its sheen. On a long-term basis, Gold gives poor, single digit returns. So, if your goal is wealth creation on a long-term, you should invest largely in equity mutual funds. However, if you are fond of Gold and would like to include it in your portfolio, do so but do not allocate more than 5 to 10 percent in Gold.

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