Sovereign Gold Bonds (SGBs) are certificates issued by the Reserve Bank of India (RBI) against grams of gold. These bonds allow individuals to invest in gold without the need for physical storage, making them a convenient and secure investment option. Since gold is less affected by market fluctuations, SGBs provide a stable investment. Over time, the price of gold tends to rise, making it a potentially profitable asset to invest in.

Issued by the RBI under Government of India stocks, SGBs are offered during specific subscription windows. These windows are typically announced every 2-3 months through a press release, during which investors can subscribe to the bond scheme in tranches. Each bond is issued in the name of the investor, and a holding certificate is provided upon successful purchase.

• Low Risk

  A Sovereign Gold Bond is issued under the Government Security Act of 2006 by the Reserve Bank of India, on behalf of the central government. This government backing makes Sovereign Gold Bonds one of the safest investment options available in India, as the chances of defaults on repayment are zero. Any risk associated with such investments can be attributed to market fluctuations, which cause volatility in gold prices.

• Convenience

  Sovereign Gold Bonds were launched under the gold monetisation scheme by the central government in November 2015. The primary aim of these treasury bonds was to reduce the hassles involved with gold investments, as bullions and other physical forms of investment require proper and secure storage.

  Investors purchasing a gold bond are issued a holding certificate as proof of their investment. Additionally, investors can choose to digitize these holding certificates and store them in their Demat accounts, further enhancing the security of their investment.

• Capital Appreciation

  Sovereign Gold Bond returns are substantial, as the price of this precious metal tends to rise in the long term. During times of stock market turmoil, investors typically shift toward gold, as it holds its value even when major companies underperform.

  Furthermore, as gold is in high demand due to its widespread usage, the market demand remains relatively steady, regardless of market fluctuations or global economic conditions. Consequently, unsystematic risks causing erratic movements in the intrinsic value of gold are minimal, allowing the investment corpus to grow significantly over time.

• Hedge Against Inflation

  As mentioned, gold prices exhibit significant capital appreciation. The rate of growth of such assets is typically higher than the prevailing inflation rates in a country, making it a vital investment avenue. Thus, individuals can enjoy growth in the real value of their investment portfolio, accumulating substantial wealth over time.

• Long-Term Investment

  The Sovereign Gold Bond Scheme 2020 has a holding period of 8 years, making it an ideal choice for individuals seeking long-term investment opportunities. It generates extensive capital gains, along with the security of preserving the initial corpus.

• Loan Facility

  Sovereign Gold Bonds are accepted as collateral for loans. Up to 75% of the market value of these bonds can be availed as a loan from any scheduled financial institution, as stipulated by the RBI’s Loan-to-Value (LTV) regulations.

• Inversely Related to the Stock Market

  Gold prices have an inverse correlation with the stock market, where any upturn in stock market returns is generally followed by reduced gold prices. During an economic boom, investors adopt an optimistic approach towards the stock market, expecting companies to perform well in response to rising aggregate demand. As a result, demand for gold bonds falls, leading to a decrease in market prices.

  Hence, during the upswing of the business cycle, gold prices tend to be relatively lower.

• Susceptible to Currency Fluctuations

  Any fluctuation in currency values tends to impact the price at which gold is traded. The appreciation of the US dollar, the benchmark currency, causes gold prices to decline due to higher inflation rates. As import expenses rise significantly, the overall investment level of a country falls, consequently affecting the demand for gold and its prices.

• Taxation Rules

  Sovereign Gold Bond returns can be classified into two types – capital gains earned on the maturity of a bond and interest earnings disbursed semi-annually. Investors holding a bond for the entire term are not required to pay long-term capital gains tax. However, periodical interest income is taxed under ‘Income from other sources’ and attracts tax rates as per the respective income tax slabs established by the central government.

  Individuals opting for resale of a bond in the secondary market must pay tax on any capital gains realised. Resale before completing 3 years attracts short-term capital gains on total profits, at rates according to the investor's annual income. Long-term capital gains, on the other hand, attract tax at 20% of the total earnings, after adjusting for indexation.

A sovereign gold bond scheme is one of the most profitable investment avenues, owing to its widespread benefits and low restrictions. Individuals having a low aptitude for risk but want to enjoy substantial returns on their corpus can choose to invest their funds in this scheme, as they are one of the highest returns bearing government-mandated scheme.

Individuals can also diversify their investment portfolio through sovereign gold bonds, which, in turn, compensates for exposure to stock market risks. In the event of the stock market downturn, gold tends to appreciate in value, thereby mitigating the overall risk level of an entire investment portfolio for the investors.

Compared to physical gold investments and gold ETFs, a sovereign gold bond can arguably be more profitable, as it is backed by the highest financial authority. However, purchasing such sovereign bonds should be considered only after analysing the financial goals and time frame of investment, as considerable funds have to be kept locked in to realise subsequent returns in the future. Also, interested individuals need to follow the RBI’s website periodically for successful subscription to such sovereign gold bonds.