Should You Invest in Sovereign Gold Bonds 2022-23 Series II?

Due to its constantly increasing value, gold has been helpful for people in times of difficulty or during a financial crisis for the past many years. When in need, we can sell our gold jewellery or pure gold bars/coins to get funds or opt for a Gold Loan.

When it comes to creating an investment portfolio, investing in equity mutual funds is necessary to earn inflation-adjusted returns and participate in the growing economy. However, since it is a high-risk instrument, you need to be very careful while selecting the right mutual fund schemes based on your risk appetite and investment objectives. While investing in asset classes that allow you to earn higher returns is crucial for a winning portfolio, a good portfolio is a mix of different asset classes that complement each other. That is why gold acts as a good diversification option.

The global geo-political tensions between Russia-Ukraine and China-Taiwan have resulted in volatility in global as well as Indian financial markets. Besides, the returns offered on fixed income financial instruments are no more appealing. During such uncertain times in the stock markets, gold is expected to gain attention and perform well.

While people traditionally prefer buying physical gold, there is a superior alternative to it - Sovereign Gold Bond, which offers many advantages over physical gold.

For the fiscal year 2022-2023, the second release of the SGB went on sale on August 22, 2022, and will remain active until August 26, 2022. The issue price of the Sovereign Gold Bond Scheme 2022-23 - Series II is Rs ₹5,197 per gram.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

What are Sovereign Gold Bonds?

Sovereign Gold Bonds are gold bonds issued by the Reserve Bank of India (RBI) on behalf of the Government of India. In other words, SGBs are government securities denominated in grams of gold. In November 2015, the Indian government launched the Sovereign Gold Bond (SGB) Scheme to provide investors with a substitute for holding physical gold. The investors are required to pay the issue price in cash, and the bonds will be redeemed in cash on maturity.

Here are the key features of the Sovereign Gold Bonds:

• The quantity of gold that the investors pay for, is protected as the investors receive the ongoing market price at the time of redemption.

• It is considered a superior alternative to holding gold in physical form as it allows you to earn from the appreciation in the gold price while also paying you the fixed interest rate.

• The investors receive a fixed interest rate of 2.50% per annum payable semi-annually on the nominal value.

• The SGB eliminates the risk and cost of storage as it is a paper-based instrument.

• The bonds are held in the books of the RBI or in a de-mat form eliminating the risk of loss, theft, etc. As an investor, you have the option to convert your holdings into a dematerialised (de-mat) form.

• There could be a risk of capital loss if there is a decline in the market price of gold. However, the investors do not lose in terms of the units of gold which they have paid for.

• It is free from concerns like making charges, GST, and gold purity that buyers of gold jewellery have to face.

• The SGBs are offered for purchase to the resident individuals, HUFs, Trusts, Universities, and Charitable Institutions. That said, NRIs and foreign institutions are not permitted to own the bonds.

• The SGB tenure is eight years. However, investors have the option of premature redemption after the 5th year from the investment date.

• The SGBs are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the SGB could be as low as one gram and can go up to a maximum subscription limit of 4 kg for individuals and Hindi Undivided Families, i.e., HUFs, and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year.

• In the case of a joint holding, the investment limit is applied to the first holder only.

• The price of the bond is fixed in Indian Rupees on the basis of a simple average of the closing price of gold of 999 purity, published by the Indian Bullion and Jewellers Association Limited (IBJA) for the last three working days of the week preceding the subscription period. The investors who subscribe online and pay through online mode get a discount of Rs 50 per gram.

• The redemption price will be in Indian Rupees based on a simple average of the closing price of gold of 999 purity of the previous three working days published by IBJA Ltd.

• The SGBs are sold through Commercial banks, Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Limited (CCIL), designated post offices, and recognised stock exchanges like National Stock Exchange of India Limited and Bombay Stock Exchange Limited, either directly or through agents.

• The customers will be issued a Certificate of Holding on the date of issuance of the SGB. Certificate of Holding can be collected from the issuing banks/SHCIL offices/Post Offices/ Designated stock exchanges/agents or obtained directly from RBI by email, provided an email address is provided in the application form.

• The interest on SGBs shall be taxable as per the provision of the Income Tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual is exempted. The indexation benefits will be provided for long-term capital gains arising to any person on transfer of the SGB.

• The SGBs are eligible for trading. However, you should know that if the bonds are sold via the exchange platform, the applicable capital gains tax will be payable at the same rate as for physical gold.

• The only mandatory document to invest in SGB is PAN Card, without which you cannot invest in the SGB.

What are the benefits of investing in the Sovereign Gold Bonds 2022-23 Series II?

1. Along with the price fluctuation gain, the SGB also offers a fixed interest rate of 2.5% per annum on the issue price. The interest is credited to the investor's registered bank account semi-annually. This is the biggest advantage over physical gold, as physical gold can only benefit you with capital appreciation.

2. The bond is issued by the RBI on behalf of the RBI, making it a transparent and trustworthy investment option.

3. Since it is a paper-based instrument, the SGB eliminates the risk and cost of storage.

4. Unlike physical gold, there are no concerns about the purity of the gold.

5. Investment in physical gold attracts making charges, GST, etc., which is completely avoided in the case of the SGB.

6. The bond can be purchased at your convenience, either online or offline. Moreover, the online purchase of the SGB through an online payment mode will reduce the price by Rs 50 per gram more than the actual issuing price.

7. It is considered a liquid investment option as premature redemption is allowed after the 5th year. Besides, in case of an emergency, you can sell the bonds or opt for a secured loan by using SGBs as collateral, with the same Loan to Value ratio applicable to the physical gold loan.

8. Since the bonds can be traded over stock exchanges, you can buy or sell them even when there is no ongoing issue from the RBI.

9. The SGB can be purchased jointly. Buying the SGB in the name of a minor along with a guardian is also allowed.

Should you invest in Sovereign Gold Bonds 2022-23 Series II?

Diversification of portfolios with different asset classes is key to a winning portfolio, especially during current economic uncertainty and constantly increasing inflation rates worldwide. Many experts advise you to consider diversifying your portfolio with at least 5% to 10% gold investment as it is an extremely liquid investment avenue that proves to be an effective portfolio diversifier. It is a worthwhile investment that helps you hedge your portfolio in a smart manner. Investment in Sovereign Gold Bonds is convenient and cost-effective compared to the investment in physical gold. Hence, if you are looking for some portfolio diversification with a low-risk investment avenue that provides a fixed interest rate, the Series II of the Sovereign Gold Bond 2022-23 is something you should consider at the moment. However, the threat of the emergence of new viruses, geopolitical tensions around the world, rising inflation, and uncertain economic conditions can result in the price fluctuation of gold. Therefore, it makes sense to invest only a portion of your investment in SGB for the long-term to stabilise your portfolio, based on your risk appetite, time horizon, and investment objectives.

Warm Regards,
Ketki Jadhav
Content Writer