The Indian Government has recently launched a new scheme called Sovereign Gold Bonds. This scheme allows an investor to invest in gold without physically purchasing the metal. The scheme is a good alternative to purchasing physical gold and investing in gold ETFs.
Here are some of the advantages and disadvantages of investing in Sovereign Gold Bond Schemes:
- No risk of theft
Gold bonds do not have the risk of theft which is usually associated with physical gold investment. Hence you only need to worry about the gold rate today in AP or Himachal Pradesh and not about the actual security of the physical gold. Visit this page for more info.
- Fixed rates
The rate of interest for sovereign gold bonds is fixed by the RBI and can be considered a benefit for those who want to invest in gold, but do not want to face the high volatility of gold prices. Since investors are paid the interest at fixed intervals irrespective of the rise or fall in the spot price of gold, they aren’t affected by price fluctuations of the yellow metal.
The tenure of SGBs is eight years, with an option to exit after five years if required. They can also be transferred from one person to another by endorsement and delivery or by registering them in the bond ledger account held at the bank or post office where they were issued.
- No selling charges
Unlike physical gold investment where one has to pay capital gains tax while selling, there is no such obligation on SGBs as they are not listed on stock exchanges. Also, there are no making charges on SGBs like on jewellery. Making charges can significantly increase the cost of investment. To confirm this all you need to do is search for today’s gold rate in bhimavaram and then ask your local jeweller how much would be the making charge on top of that.
- High liquidity
These bonds can be easily converted into cash and can be used as collateral for loans. They also offer an exit option after five years. Moreover, they can be purchased through various modes such as banking channels, stock exchanges and designated post offices.
SGBs fetch you returns on your investment equivalent to 2.55% per annum payable every six months on the initial value of the investment. The bonds will also give holders capital appreciation as they would increase their value over time.
- Hassle-free investment
One doesn’t need to buy physical gold or rent a locker to store it when one invests in SGBs
- Long maturity duration
With SGBs you need to wait for 8 years before the bond matures. While this long duration is good for avoiding the perils of gold price volatility it is for you to decide if the opportunity cost is worth it because in these 8 years you could have invested and got returns from many other places.
Investors need to hold SGBs for at least five years from the date of investment. If you want to sell them before that, you will not get any returns on your investment. But, if you hold them for more than five years, you can get interest on your investment as well as capital gains tax exemption at the time of redemption.
- Interest rate risk
If interest rates rise, bond prices fall. This will reduce the value of your bond holdings. During the tenure of SGB, if the interest rate rises, it will reduce the value of your holding and you may have to sell at a loss when you exit before maturity.