Why You Should Consider Sovereign Gold Bonds In Your Portfolio

Gold is a part of an important asset class of precious metals that every investor can consider in their portfolio mix. The exact exposure to gold within the precious metals space will vary, depending on the specific characteristics and goals of an individual.

However, the choice of which instrument to be used as the first preference is easy as Sovereign Gold Bonds win out.

Here are some reasons why this is so:

Sovereign Gold Bonds are bonds that give an exposure to the price of gold to an investor. These bonds have a tenure of eight years, with the facility of buyback after the fifth year. The bonds allow an investor to invest in gold in paper form without having to worry about the physical safety of the investment.

The SGB enable the investor to participate in the rise in the prices of gold over a period of time. This is, however, just one part of the total return from the instrument. The investor gets an additional 2.5% of interest each year, which is an extra return that is not available in the other instruments investing in gold. This extra return, by itself, makes it a good financial decision to invest.

Investors get the benefit of liquidity in the investment in two ways. One is that the bonds are listed on the stock exchanges, so the investor can sell or buy them according to their needs at any point of time. In addition, after the fifth year, there is an option to sell the bonds back to the Reserve Bank of India on the interest payment date. This increases the choices for the investor.

On the buying side, the investor can buy these bonds either in the new issues hitting the market at regular intervals or from the secondary market.

If an investor holds the bonds till maturity, then they get the benefit of tax-free status on the capital gains earned on the bond. This can boost the net return from the instrument, which increases the attractiveness of the instrument. In case the returns are high, then the savings on the tax front can be significant.

Gold prices in India are impacted by the changes in the international price of gold as well as the movement in the rupee-dollar exchange rate. The long-term history shows the rupee depreciating on a continuous basis, which adds to the return of the investment.

For example, over the last decade—from 2012 to 2022—international gold prices have barely risen but returns on gold in India are far higher only due to rupee depreciation.

The latest issue of the SGB is open for investment from Dec. 19 to 23 this year. The bonds are being issued at a price of Rs 5,409 per gram with a discount of Rs 50 for those investing online.

The minimum investment for an individual investor in the instrument is 1 gm and the maximum investment is 4 kg during the year. This includes purchases from both the new issues as well as the secondary market.

Arnav Pandya is Founder — Moneyeduschool.