Indians inherited a sentimental value for physical gold. Hence, it is predominantly the first investment choice of an Indian. There is nothing wrong with it, as gold is an appreciating asset with easy availability in a country like India.

 

However, the gold investing scenario has changed drastically over the past few years. Unfortunately, physical gold investments have not been giving significant returns to the investors. Adding to the investor woes, those who bought gold ornaments as assets receive negative returns.

 

Fortunately, people who invested in gold via a different route, namely Sovereign Gold Bonds or SGBs, have not faced the same problem. Read on to know for yourself that there is no wonder SGBs have carved their niche as a more reliable gold investment than physical gold itself.

 

This article compares physical gold and SGBs to help you understand how SGBs are a better investment choice than investing in physical gold.

 

What is Sovereign Gold Bond?

 

SGBs are investment instruments backed by the Government denominated in grams of gold. The Government of India introduced SGBs in 2015, and the Reserve Bank of India (RBI) issues the bonds on the Government’s behalf.

 

SGBs are considered substitutes for physical gold in terms of investment. Investors can buy these bonds by paying the issue price, which can be redeemed on maturity. Investors will receive, apart from the interest, the ongoing market price of gold at the time of redemption.

 

How does A Sovereign Gold Bond Differ from Physical Gold?

 

Let’s look at some prominent ways SGBs differ from physical gold as an investment vehicle.

 

• If an investor purchases SGBs, he or she can redeem them for cash on maturity without worrying about storing the physical gold.

 

• SGBs offer a fixed rate of interest.

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• The value of SGB goes up along with the price appreciation of gold.

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• The minimum acceptable amount of investment in SGB is one gram of gold. It lets you invest in these bonds in multiples of one gram of gold.

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• Although an SGB’s tenure is eight years, you can redeem your bond in five years.

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Why Investing in an SGB Better than Purchasing Physical Gold?

 

The emergence of digital technology and high-speed internet connectivity has been transforming the financial world for the past few decades. As a result, SGBs are the new age investment avenues packed with numerous benefits that physical gold cannot offer you.

 

Consider these five key factors when choosing an RBI-backed SGB over physical gold.

 

• It Lets You Invest in Gold at a Lower Price

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The gold price is fixed in every part of India and is regulated by the IBJA (Indian Bullion and Jewellers Association). Therefore, even though everyone can purchase gold at the same price, a higher cost of making and branding will be added to the physical gold or gold ornaments. Whereas Sovereign Gold Bond comes with no making and branding costs. Thus, the price of an SGB is lower than physical gold for investment purposes.  

 

• Get Two-Way Benefits

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Physical gold can only give you the gold’s price appreciation profits. But, in the case of an SGB, you are open to two-way benefits. An SGB can give you returns in two ways: One, the price appreciation of gold itself, and two, the interest rate of the SGBs.

 

You can keep the profits of the gold’s price appreciation, but SGB’s interest is taxable per the investor’s income slab. But, if you sell the SGB after the lock-in period of eight years, your returns are exempt from the Capital Gains Tax (CGT). So, in a practical sense, physical gold is a sluggish investment.

 

• No Storage Woes

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Gold is a precious metal that is prone to theft or mishandling. The sole responsibility to keep your gold safely out of all mishaps that may happen to your prized possession rests on your shoulders. Most people pay for private safety lockers at various financial institutions or houses to keep their gold safe.

 

Since an SGB is a digital asset, the only thing you should keep safely with yourself is a paper document. You don’t need to worry even if you can’t keep the paper document safely. In case of missing or misplacing your SGB documents, you can reach out to RBI and request a copy of the papers.

 

• A Sovereign Guarantee

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As you have seen, the RBI issues SGBs on behalf of the Indian Government. So, SGBs possess a sovereign guarantee on interest payment and principal repayment. In other words, the Government assures that you will get your returns while you hold the bonds and your principal on maturity without delay. The sovereign guarantee makes an SGB one of the safest gold-based investment instruments.

 

• No Need to Worry About Gold’s Purity

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The price of physical gold is based on its purity. It is also one of the major concerns when buying physical gold for ornamental or investment purposes. There is always a risk of purchasing gold with less purity, particularly those not hallmark certified. But for a digital asset like SGBs, investors do not face such problems.

 

Summing Up

 

An investor doesn’t need a Demat account to buy digital gold, but if you got one, it makes receiving the returns on your investments easier. The gold units in an SGB are allotted as per the money invested. These gold units are usually credited to your Demat account. You can invest in SGBs using a physical or electronic certificate form if you do not have a Demat account.  

 

Undoubtedly, SGBs nurture your wealth if you add them to your portfolio. Several reputed financial houses provide SGBs in various sizes and shapes that fit your investment needs. The financial experts at these institutions will guide you in purchasing these bonds. Apart from the expert financial guidance and investment management services from these reputed financial houses, you should also do your homework before picking an investment like an SGB that fits your financial objectives.

 

Justin Raj

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Alpha Research