Investing in Sovereign Gold Bonds is the best alternative investment strategy employed by many to make their portfolio sustain any abnormal movements in the stock markets. Gold bonds are considered as a safe investment and these give fixed returns and have a fixed maturity period. As these are guaranteed by the government of India, there is no probability of bankruptcy or chance of defaulting at the time of maturity.
These sovereign gold bond investing was first launched by the government of India in 2015 to provide an opportunity for those who wanted to invest in gold without owning the physical quantity of gold. These bonds are backed by an equal quantity of gold in monetary value.
Why Invest in Sovereign Gold Bonds
Sovereign gold bonds are issued by the Reserve Bank of India(RBI) on behalf of government of India. These gold bonds are issued in denominations of grams of gold. This is a good method to invest in gold as the gold prices are always on the upward move over the past years. In the long run, gold always give returns which beat the inflation of that period. But buying and selling of physical gold involve lot of charges including the handling charges. Hence sovereign gold bond are best option as these involve less charges when compared to owning physical gold.
These gold bonds have a maturity period of 8 years and also they offer an interest rate of 2.5% per annum which usually paid bi-annually.
How to Invest
Sovereign golds bonds are issued by the RBI in different trenches. One who wishes to buy gold bonds need to subscribe to these during the period mentioned by the RBI. The following tables gives the dates and data about the tranches for the Year 2020-2021. These days may change from time to time as may be decided by the RBI. Visit RBI website for the exact dates.
When the issue for the Gold bonds starts it will last for 5 days in general. During these days the investors need to subscribe to the bonds from an authorized stockbroker. You may use the following links for the brokers to invest in gold bonds. Zerodha(Click here). RBI also gives discount to the investors who invest in the bonds via SCBs and pay the amount online.
Investors who missed for the subscription need not worry about them as they can always buy the bonds from the secondary markets. these bonds are tradable on the stock exchanges and investors who subscribed can sell in the secondary market and investors who are interested can buy from the secondary markets.
Benefits of Buying Sovereign gold bonds from Secondary Markets
Investors who are investing the sovereign gold bonds are long term investors who look for a consistent bi-annual interest payment and also the returns at the time of maturity. Because of this, the sellers in the secondary market is very less. Because of this the volume of these bonds in the secondary market is very less. Hence investors will always find that these bonds will be available at a discounted price when compared to the actual gold price in the market.
Hence investors can use this discounted price to buy the sovereign gold bonds from the market and can hold them till the maturity to gain returns. But if the investors are looking to buy and sell in the secondary markets itself, then this method of taking advantage of discounted price may not be that effective, as you again will be selling the bonds at a discounted price compared to the gold prices in the market.
And also many times the price will fluctuate largely if you are buying in large quantities and bulk at a time. This is because the volume of the bonds is very small usually around 100-200. And hence if you are buying the bonds in bulk, the price may shoot up temporarily. That is why always try to buy in small quantities when buying from the secondary market. And also in the secondary market, you may have to use the market orders. Limit orders may not guarantee the completion of trade as the volume is less and you may not get the seller at the price determined by you.
Before buying from the secondary market, consider the price fluctuation in the price of gold in the market. As the price of sovereign gold bonds will vary depending on the price of the gold in the market, it is important to understand and find in there is any possibility of price fall in the gold in the coming days.
Another important benefit of investing in sovereign gold bonds is the tax benefit the government is providing for the investors. the government wanted to make investing in gold bonds attractive to the investors. And in that manner, it have announced a separate tax benefits for the investors investing in sovereign gold bonds. The capital gains that the investors realize at the time of maturity of sovereign gold bonds are not subjected to capital gains tax.
This is applicable to the bonds that are purchased during the subscription period and also to the bonds purchased from the secondary markets. When you buy the bond from the secondary market, the bond is directly transferred to the buyer from the seller. Hence the transaction is not treated as a redemption of the bond, but a transfer of bond from one person to the another. After the transfer, you become the bondholder and will receive tax-free redemption proceeds on maturity.
Important to remember is that this tax benefit on capital gains will be applicable only if you hold the bond till maturity. If you sell the bonds before maturity and realize capital gains, in that case you need to pay taxes on the capital gains thus realized. If the bonds are sold within a period of 3 years without holding till maturity then the gains are treated as short term capital gains. If the bonds are sold after holding for 3 years without holding till maturity, then the gains are considered as long term capital gains. In accordingly the taxes are applicable based on long term capital gains or short term capital gains.
Gold bonds are a good investment options for investors who wanted steady returns and interested in investing in gold. These bonds also provide stability to the overall portfolio of the investors. these help to reduce the loses in times of adverse movements in the markets as we know that when the markets are falling the prices of gold will increase and hence the gold bonds will increase in value.
And also as these are guaranteed by the government of India, they are most secure investment option that is available with no or negligible chance of defaulting the payment both the bi-annual interest and the amount at the time of maturity.