Learn with ETMarkets: How to unlock benefits of sovereign gold bonds?

Gold, with its timeless allure, has always been a beloved form of investment for Indian investors. Its rescind lifetime highs would be inspiring to gold enthusiasts. A perfect hedge against inflation, gold has been a safe haven, an epitome of stability. For centuries, in the face of economic upheavals, currency fluctuations, and geopolitical changes, gold has been a steadfast refuge for Indian investors. However, is its luminous sheen worth the investment in physical gold in today’s ever-changing financial landscape?

Adding gold to the investment portfolio serves various benefits, such as diversification, storing of value, and hedging against inflation. Nevertheless, investment in physical gold brings with it a set of challenges, such as storage costs and security risks. Storing physical gold, whether in the form of bars or coins, can be expensive. Investors may need to incur costs for secure storage, such as a safe deposit box or a secure facility. Security concerns also arise, as the physical nature of gold makes it susceptible to theft. Hence, the question arises – Is there a way one can invest in gold while avoiding storage and security concerns?

About Sovereign Gold Bond

With the high degree of digitalisation in the modern world, one can explore investing in gold digitally through Sovereign Gold Bonds. Backed by the Government of India, SGBs are issued in grams of gold and act as an efficient substitute for storing physical gold. Investors can invest in tranches of SGBs when they are open for subscription. The price of an SGB is calculated on the basis of a simple average closing price of gold of 999 purity, as released by the Indian Bullion and Jewellers Association Limited (IBJA) for the last 3 business days preceding the subscription period.

Along with capital appreciation, SGBs also have a coupon rate of 2.50% and a maturity of 8 years. Investors of the first-ever sovereign gold bond tranche 1 earned a capital appreciation of over 10% in a span of 8 years, in addition to a 2.50% annual coupon rate. (Source – The Economic Times).

Benefits of Sovereign Gold Bonds

Diversification – Gold has a low degree of correlation with any other asset classes. This means that while other asset classes may be impacted by volatility, gold is known to be a safe and stable investment. Throughout centuries, gold has acted as a store of value, and hence, investment in gold through SGBs helps in wealth preservation in the long term. Including SGB in the portfolio can help spread and mitigate the risk, thereby reducing overall portfolio volatility.
Capital Appreciation – During times of high market volatility, investors, in general, tend to turn to safe havens, and they find this safety in gold. With growing consumption and rising global demand for gold, the price of gold has seen a rising trend over the past. The price of this precious metal is likely to follow an upward trend in the long term and hopefully present a chance of capital appreciation.
Hedge Against Inflation – For long, gold has been seen as an asset /currency to hedge against inflation due to a steady rise in prices in the long run. With SGB, this argument gains more weight as, in addition to capital appreciation, one also now enjoys a fixed interest rate on the investment. Combined, the total returns are likely to beat inflation and may even outmatch the returns on traditional investment avenues like fixed deposits.

Safety – Since SGBs are issued by RBI on behalf of the government of India, it is one of the safest investment avenues in India. Any potential risk is generally related to volatility in gold prices since the risk of defaults on repayments is minimal due to the strong government backing. Further, there are many more advantages of having gold in digital form, as it provides freedom from worries of purity, storage, and safety while also avoiding other costs and charges related to physical gold transactions.

Loans against SGB – SGBs can also easily serve as collateral for obtaining loans from banks, financial institutions, and Non-Banking Financial Companies (NBFCs). The Loan-to-Value (LTV) ratio for these loans is the same as the guidelines set by the Reserve Bank of India (RBI) for regular gold loans. However, the decision to grant a loan against SGBs rests with the discretion of the respective bank or financing agency and is not guaranteed as an automatic entitlement.

In conclusion, SGBs can be a great investment avenue for anyone looking to diversify their portfolio. Moreover, it is one of the best investment avenues for investors who have a low appetite for risk. SGBs can also be especially beneficial for those who still rely on physical gold to fulfill their financial needs due to the challenges related to the storage and security of gold. Hence, investors should explore this option and consult a financial advisor who can further guide in incorporating SGBs into their investment portfolio.

(The author is Chief Executive Officer at NJ Wealth)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)