In recent years, people have become more interested in investing in gold due to its rising value and stability. As a result, Sovereign Gold Bonds (SGBs) have emerged as a popular investment option for many. In this article, we’ll explore what SGB full form is, their advantages, and how they work.
What are SGBs?
SGBs are government-backed securities that allow investors to invest in gold without actually owning physical gold. They are issued by the Reserve Bank of India (RBI) on behalf of the government of India. These bonds are denominated in grams of gold and have a tenure of eight years. The minimum investment in SGBs is one gram of gold, and the maximum is four kilograms.
Advantages of Investing in SGBs
One of the major advantages of investing in SGBs is that they offer tax benefits. The interest earned on SGBs is taxable, but capital gains arising from the redemption of SGBs are exempt from capital gains tax. Additionally, there is no wealth tax on investments in SGBs.
Safety and Security
Since SGBs are issued by the government of India, they are considered to be one of the safest and most secure investment options. The risk of default is almost zero, and the investor is guaranteed to receive the principal and interest on maturity.
SGBs can be traded on stock exchanges, which means that they are highly liquid. The investor can sell the bonds on the exchange before maturity, which provides an easy exit option in case of urgent financial requirements.
The price of SGBs is transparent and is linked to the prevailing market price of gold. This means that the investor can buy or sell the bonds at the prevailing market price, which eliminates the need to negotiate prices with dealers.
How SGBs work
When an investor buys SGBs, they are essentially loaning money to the government. The government uses this money to finance its activities, and in return, the investor receives interest on the loan. The interest rate on SGBs is fixed by the government and is paid semi-annually.
At the end of the eight-year tenure, the investor receives the principal amount, which is equivalent to the prevailing market price of gold at the time of redemption. The redemption price is calculated based on the average closing price of gold of 999 purity for the previous three business days.
How to Buy SGBs
Investors can buy SGBs through scheduled commercial banks, designated post offices, and stock exchanges such as the National Stock Exchange and the Bombay Stock Exchange. The bonds are sold in tranches, and the dates for the sale of each tranche are announced by the government.
To purchase SGBs, investors need to submit a duly filled application form along with the required KYC documents. The payment for the bonds can be made through cash, cheque, demand draft, or online transfer.
Who Should Invest in SGBs
SGBs are a good investment option for those who want to invest in gold but do not want to deal with the hassles of physical gold such as storage and safety concerns. Additionally, they are a good hedge against inflation and currency devaluation.
SGBs are also a good option for those who are looking for long-term investments with stable returns. The interest rate on SGBs is fixed, and the capital gains on redemption are tax-exempt, making them an attractive investment option.
Risks Associated with SGBs
While SGBs are considered to be a safe investment option, there are some risks associated with them. The price of gold is subject to fluctuations, and hence, the returns on SGBs are not guaranteed.
Additionally, the interest rate on SGBs is fixed, which means that the investor may miss out on higher returns if the market interest rates increase.
Moreover, SGBs have a long tenure of eight years, which means that the investor’s money is locked in for that duration.
In case of urgent financial requirements, the investor may have to sell the bonds on the exchange, which may result in capital losses if the market price of gold has fallen.
Sovereign Gold Bonds are a safe and secure investment option that offers tax benefits, liquidity, and price transparency. They provide investors with an opportunity to invest in gold without actually owning physical gold. Additionally, they are a good hedge against inflation and currency devaluation.
- What is the minimum investment in SGBs?
The minimum investment in SGBs is one gram of gold.
- What is the maximum investment in SGBs?
The maximum investment in SGBs is four kilograms.
- What is the tenure of SGBs?
The tenure of SGBs is eight years.
- Can SGBs be traded on stock exchanges?
Yes, SGBs can be traded on stock exchanges.
- What is the redemption price of SGBs?
The redemption price of SGBs is equivalent to the prevailing market price of gold at the time of redemption, which is calculated based on the average closing price of gold of 999 purity for the previous three business days.