Vittae Blogs

Tag: sgb

  • Why is SGB the best option to invest in Gold?

    Why is SGB the best option to invest in Gold?

    Alongside China, India is by far the world’s largest importer and consumer of gold. Gold is one of the most preferred investments in India. With over 95% of Gold being imported, the yellow metal turns adverse to India’s forex reserve. To address this problem, Government of India launched Sovereign Gold Bonds (SGBs) in 2015 under the ambit of the Gold Monetisation Scheme.

    The objective of the scheme was to cut down the demand for physical gold and shift a part of the domestic savings (used for the purchase of gold) into financial savings. 

    SGBs are government backed securities, issued by the Reserve Bank of India (RBI) on behalf of the Indian government. Investors have to pay the issue price and the bonds will be redeemed upon maturity.

    How to buy Gold Bonds? 

    SGBs can be ordered through the Net-banking option of banks, from designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) or even through authorized stock exchanges. Investors can also download the application from RBI’s website or through bank sites.

    Sovereign Gold Bond
    Sovereign Gold Bond

    Who can invest through SGBs?

    “Residents” in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGBs. Eligible investors include individuals, HUFs, trusts, universities and charitable institutions. Joint holding is allowed in SGBs. For minors, the application has to be made by his/her guardian(s).

    Can NRIs invest in SGBs?

    Only residents of India are eligible to invest in SGBs. Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGBs until early redemption/maturity.

    SGBs vs Physical gold


    SGB vs Gold
    • SGBs offer a superior alternative to holding gold in physical form since the risks & costs of storage are eliminated. SGBs are free from issues such as making charges and purity in the case of gold held in the form of jewelry. 
    • The flip side of SGBs is their fixed lock-in period. SGBs are issued for a fixed term of eight years with an option to redeem them from the fifth year onwards at the RBI buyback window.
    • Also, if gold bonds are sold prematurely on the stock exchange before three years, then they will attract short-term capital gains tax (STCG) as per the investor’s slab rate. But if they are sold after three years, then long-term capital gains tax (LTCG) of 20 per cent will be applicable, and the investor will also get indexation benefits. And, if one were to hold the bonds until maturity, or until the RBI buyback window, then capital gains tax will not be applied. 

    Price of Sovereign gold bond

    The Reserve Bank of India (RBI) fixes the issue price per gram for each tranche by calculating the simple average of the closing prices of 999 purity gold as disclosed by Indian Bullion and Jewellers Association (IBJA) on the last three working days before the week marked for the subscription.

    Our Take

    Buying gold jewelry isn’t an investment. But if the idea is to remain invested in Gold, then SGB is the best option in the market. Along with capital gains, investors are paid interest rate. NO GST during purchase and NO Capital gains tax on sale. And also, India need not shell out dollars from its reserve. It’s a win-win situation.

  • Is It The Right Time To Start Gold Investment?

    Is It The Right Time To Start Gold Investment?

    Gold Investment is considered to be an all weather investment. More than an investment, Gold is treated as an insurance for all the other investments. It is a hedge against inflation.

    During an economic downturn while asset classes such as stocks, mutual funds and real estate may tumble, Gold would still sustain and outperform them. This is the reason why portfolio managers always insist on having a fair share of your investments in gold.

    Gold_Investment

    Today, we see the stock markets across the globe have become more volatile due to geo-political tensions with Russia- Ukraine conflict and stringent covid-lockdown in China. Fears of economic recession and increase in Fed rates has created the perfect situation for gold to skyrocket again.

    Is this the right time to invest in gold? Ideally, yes. Stock markets are down, cryptos have crashed and real estate is yet to recover. Gold at its present value looks attractive. Experts believe people will shift their focus to gold if stock don’t recover soon.

    Gold’s performance in the last 20 years

    The annualized return from march 2000 to march 2020, Nasdaq 100 had a return of 2.5 percent, S&P 500 gave a return of 4 percent whereas gold gave a return of almost 9 percent. 

    In 2020, gold delivered an annual average return of 24.6 percent. Over the last 40 years gold provided an average annual return of 9.6 percent and negative returns only at 8 instances. 

    Stock Vs Gold performance during the economic crisis

    During the 2008 global financial crisis, while the stock market fell as much as 60 percent, gold remained unaffected and in fact it grew by 6 percent. The same would be visible with multiple other crisis situations like the East-Asian crisis. 

    This clearly indicates that gold is a safe bet when it comes to economic downturns. 

    How to start gold investment? 

    There are multiple options to invest in Gold like buying physical gold, Gold ETFs or Sovereign Gold Bonds (SGBs). 

    • Physical Gold can be purchased in the form of coins or bars. Buying jewelry isn’t an investment.
    • A gold ETF is a type of ETF that can be purchased or sold on a stock exchange like any regular stock. The option eliminates storage costs & security risks of holding physical gold but comes with an expense ratio and Capital gains tax.
    • SGBs are substitutes for holding physical gold. SGBs are less risky as they are guaranteed by the government. But there is more to add, these bonds offer 2.5% interest and NIL Capital Gains tax if they are redeemed by completing the term(8years).

    Options like SGBs and Gold ETFs are termed as Paper-Gold which obviates the need to buy physical gold and store them while assuring the same return.

    If the World Bank & IMF are to be believed, the global economy is slowing down significantly due to covid and geo-political tensions. Global trade has shrunk. And stocks, mutual funds, cryptos, real estate will see a major correction. Smart investors looking for better investment options would definitely find gold as their best bet. So it’s time for you to become smart by starting to invest in gold.