Sovereign gold bond

Almost every household in India owns gold both as jewellery and as an investment, and it never goes out of style. In this blog, we will discuss the best option to invest in gold. First, let’s review what sovereign gold bond is, followed by the features that make them a  good digital gold investment option.

“Economics is all about consumption. People either spend money now or they use financial instruments – like bonds, stocks, and savings accounts – so they can spend more later.” – Adam Davidson

List of contents

1. Importance of investing in gold
2. Option available to invest in gold
3. What are sovereign gold bond scheme (SGBs)?
4. Features and benefits of investing in SGBs
5. Ways of investing in SGBs
6. How to invest in SGBs in primary market
7. How to invest in SGBs in secondary market through zerodha
8. Advantage of SGBs
9. Disadvantage of SGBs
10. Conclusion

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Importance of investing in gold

Gold has been a preferred investment option for centuries, not just for its intrinsic value, but also a hedge against inflation and market volatility. When economic uncertainty strikes, gold is often viewed as a haven. Investing in gold is considered to be a safest and best option to protect their investment during the uncertainty in stock market or economy.

Throughout history gold has been regarded as a reliable investment for its financial stability and it’s regarded as a symbol of wealth and prosperity. because of this, its popularity has kept soaring among individuals.

Option available to invest in gold

Currently gold is the only commodity which has wide range of investment options.

1. In Physical form

A) jewellery       B) Coins / Biscuits              C) Gold saving schemes

2. In Digital Form

A) Sovereign gold bond (SGBs)

B) Gold exchange traded funds (ETFs)

C) Gold mutual funds

D) Digital gold (Through Mobile app like phonepay, paytm, Groww etc)

What are sovereign gold bond (SGBs)?

SGBs are an investment scheme to invest in gold (24 carat gold). Bonds are issued in units of the value of grams. The minimal unit is worth a gram of gold. It launched at the end of 2015 under Gold Monetization Scheme. SGB are government securities with prices linked to the value of the underlying asset i.e. gold. They are issued by the Reserve bank of India on behalf of the government. It is substitutes for holding physical gold. They are held in demat form and denominated in grams of gold.

You can invest in a minimum of one gram of gold, and maximum in case of individuals and HUF is 4 Kgs.

Features and benefits of investing in SGBs

1. Safe & Secure:-  SGBs are one of the safest investment options as they are backed by the government of India. SGBs do not carry any risk associated with holding physical gold, except the market risk. The bonds do not have any heavy making or designing charges or TDS. in addition to this one more benefit is, no one can steal SGBs.

2. Returns: – SGBs offer guaranteed annual interest at 2.5% p.a. and payouts of interest are made every 6 months. 

3. Expenses/charges:– SGB are the only option where there is no expense or charges. On the other side as we know there are making charges in case of physical Gold. In Gold ETF and Gold Mutual Fund, there are charges of approximately 1-1.5%. In case of trading in derivatives also there are some brokerage and transaction charge.

4. Storage Space:- SGB requires no physical storage space to store it. It just required demat account to hold it but if you decide to invest in physical gold such as jewelry, Coin and gold biscuits. This is going to risky sometime unless we have reliable and safe storage space. This can either be your home locker and bank locker. Storing physical gold in an external facility charges a certain percentage of fees.

5. Trading on exchanges: You can trade SGBs on the secondary market similar to stocks. For example, after holding the bond for five years, one can trade them on NSE. NSE has all the SGBs after listing. 

Ways of investing in SGBs

There are two ways to invest in SGBs

• Primary Market: The primary market is the first point of issuance of the SGBs by the Reserve Bank of India (RBI). Investors can subscribe to the SGBs during the specified dates through the authorized banks, designated post offices, stock Holding Corporation of India and online platforms such as Zerodha and other brokers. In the primary market, investors can purchase SGBs at the issue price, which is usually lower than the prevailing market price of gold.
• Secondary Market: The secondary market is the platform where investors can buy and sell SGBs after they have been issued in the primary market. Individuals can trade in the bonds on stock exchanges such as NSE and BSE through their broker i.e. online trading platforms available such as Zerodha, Groww and other.

How to invest in SGBs in primary market

Investing in SGBs is a simple and straightforward process. Here are the step you can follow to invest in  SGBs 

1. Check the eligibility criteria: The first step is to check if you are eligible to invest in SGBs. Resident individuals, HUFs, trusts, universities, and charitable institutions can invest in these bonds.
2. Open a demat account: To invest in SGBs, you need a demat account because they are held in electronic form.
3. Apply for the bonds: government announces the issuance dates in advance. You can apply for the bonds through designated banks, post offices, or stockbrokers.
4. Make the payment: You can make the payment through net banking, debit card, or cheque.
5. Receive the bonds: Once your payment is received, you will receive the bonds in your demat account within T+1 working days. You will also receive a certificate of holding from the depository participant.
6. Hold or sell the bonds: You can hold the bonds until maturity, which is eight years from the date of issuance. Alternatively, you can sell the bonds on the stock exchange if you need to liquidate your investment.

How to invest in SGBs in secondary market through zerodha

Since most beginners prefer Zerodha, I have chosen it as a broker here. Here are the steps you can follow to invest.

1. Login to Zerodha Kite: Go to the zerodha kite website and log in using your account details. To open account in zerodha click here.
2. Search for SGBs: Once you have logged in, click on the “Market Watch” tab and search for sovereign gold bond in the search bar.
3. Select the SGBs: Select the SGBs that you want to invest in from the list of securities that appear in the search results.
4. Place an order: After selecting the SGBs, place an order to buy the specified quantity at the current market price. . You can also set a limit price to buy the bonds at a specific price.
5. Confirm the order: After placing the order, you need to confirm it before it is executed. Review the details of the order and click on the “Confirm” button to execute the order.
6. Payment: Once your order is executed, you need to pay for the bonds through your trading account. The payment will be debited from your trading account, and the bonds will be credited to your demat account
7. Receive the bonds: The bonds will be credited to your demat account within T+1 working days of the payment being received.

Advantage of SGBs

SGBs offer many advantages to investors who are looking to invest in gold.

1. Safety: The government of India issues SGBs, making them a safe investment choice for individuals.
2. Storage: Investing in physical gold comes with storage and security issues. With SGBs, investors don’t need to worry about storage or security issues as the bonds are held in electronic form.
3. Attractive interest rate: SGBs offer an interest rate of 2.50% per annum. This makes the bonds an attractive investment option for investors.
4. Tax benefits: If you hold the SGB bond till maturity i.e. 8 years, you will be exempted to pay capital gain tax. Interest income will be taxable as per your slab rates. So, SGB bonds have an edge over other investment options because of tax free capital gains. This makes the bonds a tax-efficient investment.
5. Liquidity: The stock exchange lists SGBs, making them easily tradable. This provides investors with the flexibility to sell the bonds in secondary market before maturity it they need to.

Disadvantage of SGBs

While SGBs offer various advantages they also come with some disadvantages. It’s important to consider these drawbacks before putting hard – earned money in these bonds. Here are some disadvantages of SGBs 

1. No physical possession of gold:- SGBs are held in electronic form. Whereas we can hold, touch and feel the physical gold. There may be some investors who prefer the physical nature of gold over the electronic form of these bonds because of attachment with physical gold which gave happiness to them by holding them in hand.
2. Market uncertainty:- Price of SGBs is directly related to Price fluctuations in stock exchange. The price of gold is subject to fluctuations based on several factors, such as global economic conditions, geopolitical tensions, and currency movements. As a result, the value of SGBs may also be subject to price fluctuations.

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Conclusion

Sovereign gold bond is a great investment option for investors who want to invest in gold in a safe, secure and effective way. With features like easy transaction, tax benefits and government backing, it is definitely worth considering for your investment portfolio. It offers an excellent alternative choice to physical gold and provides an opportunity to earn regular income through its attractive and lucrative interest rate. Among all the available schemes, this gold bond scheme is the best at the moment. 

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