Sovereign gold bonds (SGB), public provident fund (PPF), and bank fixed deposits (FDs) are commonly acknowledged as safe investment alternatives. All three options provide a secure and enduring investment opportunity, which can make choosing between them quite difficult.
The Reserve Bank of India issues Sovereign Gold Bonds on behalf of the Government of India. These bonds are offered in various denominations of grams of gold, starting from 1 gram, and the minimum investment allowed is 1 gram. Investors who purchase sovereign gold bonds receive an annual interest rate of 2.50%. The maturity period for these bonds is eight years, and there is an option to exit after the fifth year.
Puneet Maheshwari, Director at Upstox, highlighted the advantages of Sovereign Gold Bonds over PPF and Fixed deposits, considering the holding period of eight years. He emphasized that gold prices adjust according to inflation over a longer period, and the interest paid by the RBI is assured. Additionally, investors can benefit from tax advantages as there is no capital gains tax. These factors make Sovereign Gold Bonds a superior choice for investors seeking stability and growth in their portfolios.
Pankaj Shrestha, Head of Investment Services at Prabhudas Lilladher Pvt. Ltd., further emphasized the benefits of Sovereign Gold Bonds for long-term investors. He mentioned that there is no tax on the capital gains if the investment is held till maturity. Moreover, Sovereign Gold Bonds provide an additional assured annual interest of 2.50% until maturity, on top of gold returns. These unique benefits are exclusive to Sovereign Gold Bonds and are not available in any other form of gold investments.
After the removal of Long-Term Capital Gains (LTCG) benefit from Gold ETF & Gold Mutual Funds starting from April 1st, 2023, the attractiveness of SGB as an investment option has increased. Gold is considered a safe haven among various asset classes and experts suggest allocating 5% to 10% of a portfolio towards gold to hedge against the volatility in equity markets. According to Gurmeet Singh Chawla, Director at Master Capital Services Ltd, investing in sovereign gold bonds (SGBs) is the ideal choice for individuals looking for exposure to gold over an 8-year investment horizon.
SGBs have a history of providing satisfactory returns. For example, the SGB 2016-Series I, which matures on February 8, 2024, offered an impressive XIRR of 13.6% or an absolute return of 163% to investors, as stated by the Director at Master Capital Services Ltd.
Benefits of investing in Sovereign Gold Bonds
1) Adding SGBs to your investment portfolio can provide valuable diversification opportunities.
2) These gold bonds, supported by the Reserve Bank of India, offer a heightened level of credibility.
3) With an attractive return rate, SGBs present an appealing investment option.
4) As the price of gold rises, the value of SGBs appreciates, making them a potentially profitable investment.
5) Moreover, the interest earned on SGBs is exempt from income tax, providing an additional advantage for investors.
Drawbacks of bank fixed deposits
1) According to Amit Gupta, there is always a possibility of losing all or part of your investment in fixed deposits if the bank goes bankrupt, despite them being considered a safe investment.
2) It is important for an investment to have a return that surpasses the inflation rate, even after accounting for taxes. However, fixed deposits usually have interest rates that are lower than the inflation rate in most cases.
3) The interest earned from a fixed deposit is subject to taxation, making it a taxable income.
4) One drawback of investing in fixed deposits is that they offer a fixed rate of interest, which is generally lower compared to the returns provided by other investment options.