What is the Gold bond scheme and should you invest?
Sovereign Gold Bonds: A Golden Bridge to Traverse Volatile Financial Markets
Gold’s allure for mankind has been longstanding and inexplicable. Few asset classes can outshine the popularity gold holds.
Asset classes such as equities, fixed income, real estate and gold offer varying returns in differing market situations. Over the last 15 years, gold has given an annualized return of 17%.
Add to this the low correlation between gold and other financial assets and we have a robust case for its inclusion in financial portfolios. Allocating a fraction of your overall portfolio to gold helps the portfolio tide over periods of sharp volatilities in equity markets.
Why Sovereign Gold Bond?
The World Gold Council estimates that Indian households and trusts own close to 25,000 tons of gold. A significant chunk of the metal is concentrated in jewelry. Parting with jewelry is often costly in terms of discounted craftsman charges and the memories the jewelry holds.
But you have a good compromise in the form of SGB, an instrument issued by the Govt of India. The bond allows you to invest in gold while drawing semiannual interest payouts. At maturity, you receive your principal along with the returns. You may even buy a piece of jewelry with that money, if you so choose. That way, you would not have lost money in making charges or storage charges, and would have realized the true appreciation in gold value over the years.
SGB: An ideal route to get exposure to gold
- Being issued by Reserve Bank India on behalf of the Government of India, it comes with a Sovereign Guarantee on payment of interest and repayment of principal on redemption or maturity.
- The semiannual coupon payouts act as a supplementary source of income. However, these interest payouts are taxable.
- The sovereign-guarantee the bond comes with, makes it acceptable as a collateral for availing loans
- The maturity proceeds of the bond, including any capital gains it may have earned, are completely tax-exempt.
So, what is stopping you from investing in this tax-efficient, Sovereign-guaranteed instrument, which also supplements your cashflows with interest payouts?
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