In a hurry? Read this summary:

• Sovereign Gold Bonds (SGBs) are issued by the Reserve Bank of India and are denominated by a specific quantity of 24-carat 999 purity gold. They allow one to invest in gold without having to store it physically or insure it.
• They offer several benefits, including tax efficiency, capital appreciation, low risk levels, reduced logistical issues and costs, and portfolio diversification, amongst others.
• SGBs cater to diverse investor priorities: From securing a stable income to long-term wealth creation. This makes them ideal for both risk-averse and growth-focused investors.

Gold is not just a symbol of wealth. It is also a dependable means of wealth creation. The metal, not just in terms of value proposition, but in the ways in which one can invest in it as well, moving beyond physical ownership. Namely, via sovereign gold bonds.

These instruments offer the security of gold and the convenience of a singular financial instrument. Here is what they are, how they work, and the advantages they offer.

Understanding the fundamentals of sovereign gold bonds

Sovereign Gold Bonds (SGBs) are government-backed securities issued by the Reserve Bank of India, bound to a specific quantity of 24-carat 999 purity gold. These instruments allow investors to invest in gold without having to buy or store it physically or insure it.

SGBs and the enduring value of gold

First introduced in November 2015 to address the ever-increasing demand for physical gold, SGBs provide for capital preservation as well as appreciation.

Gold is an effective hedge against inflation and market volatility since its value remains stable and even rises when other asset classes such as equity or debt instruments decline. This is because it is a tangible resource finite in nature, which cannot be created at will. Scarcity helps preserve its value and even enhances it over time, especially when inflation causes the purchasing power of paper currency to reduce.

Pricing, tenure, and liquidity

The issue price for SGBs is based on the closing average of 999-purity gold reported by the India Bullion and Jewellers Association (IBJA), over three business days preceding the beginning of the subscription period. They have a fixed maturity of eight years, with an option to exit after the fifth year. SBGs are therefore suited to investors with a medium-to-long-term investment horizon.

Minimum investment thresholds for SGBs stand at one gram per individual, with a cap of four kilograms per year. For institutions and trusts, this cap is 20 kilograms per fiscal year.

Why SGBs deserve a place in your portfolio

SGBs provide investors with several meaningful benefits that make them a compelling investment avenue, regardless of one’s financial goals, investment horizon, and risk profile.

Capital appreciation

SGBs offer an added advantage when it comes to capital appreciation, when compared to physical gold. In addition to tracking the price movements of the latter, which usually tends to rise during inflationary periods, SGBs also provide a fixed annual interest rate of 2.5% per annum, resulting in greater overall returns for investors.

Sovereign guarantee

Being issued by the country’s central bank, on behalf of the Government of India, SGBs carry better credit ratings, and therefore overall security, when compared to other private debt instruments, as well as physical gold stored at home.

Lack of storage and purity hassles

SGBs help avoid the costs, risks, and logistical issues of storing physical gold such as locker fees, worries of theft, and more. Additionally, being paper instruments tied to the value of 999-purity 24-carat gold, one need not be worried about purity either.

Liquidity and flexibility

Though the fixed tenure for SGBs is eight years, they can be traded on stock exchanges in demat form or be redeemed after five years. They can also be used as collateral against loans. All this means that individuals with varying liquidity preferences can consider investing in them.

Portfolio diversification

SGBs in your portfolio help balance exposure to equities and mutual funds that provide market-linked returns, and other debt as well. Gold has historically had low correlation with other asset classes and broader market performance, making SGBs a suitable tool for risk mitigation in investor portfolios.

Tax efficiency

SGBs held for the entire duration of their eight-year tenure attract no capital gains tax. They are only subject to taxes on interest income, under ‘Income from other sources’ as per the existing tax slabs established by the central government.

Investing in SGBs: A smarter way to bolster your investment portfolio

Whether you are looking to ensure portfolio stability, build a retirement corpus, or looking for a tax-efficiency, SGBs serve several purposes. They are suited to both those looking to ensure capital appreciation as well as preservation. Additionally, risk-averse investors can also consider investing in them, given their low correlation with capital markets.

Those with a long-term investment horizon may choose to invest in them too, since they have an eight-year maturity timeline, and provide an option for an early exit from the fifth. Given their potential for capital appreciation and stable returns, SGBs also make for a great addition to the portfolios of aggressive investors ready to weather varying market cycles.

Here are a few quick steps for one to get started on SGB investments:

• Look out for fresh SGB subscription announcements by the RBI.
• Complete your KYC requirements and subscribe to them either online or via branches of authorised banks, or demat accounts.
• Choose how you would like to hold them. SGBs can be held in both certificate form and demat. Doing the latter allows you to trade them on stock exchanges after the initial lock-in.

If you are looking to add SGBs to your investment portfolio, reach out to your relationship manager at Standard Chartered Bank today for trusted advice and transparency throughout.