Indians have been investing in gold since time immemorial. In recent years, sovereign gold bonds have become a popular investment option against physical gold. Is it really a better alternative? We find out.
Come Akshaya Tritiya, and millions of Indians flock to jewellery stores to buy gold on the auspicious day, each year. This gold could be in the form of coins, bars or ready jewellery. Indians consider gold the best and safest investment in a market that is largely uncertain; it never goes out of fashion and never depreciates in value. But in 2015, the Government introduced the sovereign gold bond scheme, an alternative to buying physical gold as an investment. Under this scheme, individual buyers or companies can buy a minimum of 2 grams or a maximum of 500 grams worth of gold bonds in a year.
Does investing in a sovereign gold bond score over buying physical gold? Do consider the pros and cons before buying gold bonds.
Advantages of gold bonds
- There isn’t one isolated benefit of sovereign gold bond scheme. Gold bonds are a safer, more lucrative investment over physical gold.
- They are only available for purchase through post offices, select leading banks and the stock exchange, and come in the form of demat or paper bonds.
- Do note that the gold bond has no value if the gold is converted into jewellery.
- Physical gold, on the other hand, can be vulnerable to theft when stored at home. It can also cost the investor a premium over the market price while buying, and fetch a lower rate while selling.
- On the other hand, gold bond interest rate is pegged at 2.50% for the buyer, and this is over and above the capital gain.
- The interest rate for gold bonds is not compounded, and is paid in half-yearly periods. Physical gold does not generate any additional interest at all, thus proving gold bonds to be a better investment option overall.
What to consider before buying gold bonds
Gold bonds have a tenure of 8 years, 5 of which are a lock-in period. Buyers can redeem their bonds only at half-yearly intervals after five years. It would therefore be prudent to have a fixed, specific goal such as a child’s education, their wedding, or your retirement before deciding to invest in gold bonds. Unlike physical gold, a sovereign gold bond cannot be sold back if immediate funds are needed.
Redeeming a sovereign gold bond depends completely on the market rate at the time of selling. The market rate may sometimes be lower than the rate at which the bonds were purchased, so timing the redemption well is important.
Lastly, gold bonds cannot be purchased as and when required. The Government opens a window or a ‘tranche’ at specific intervals in a year, and investors must purchase their bonds only during this period.