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Should Sovereign Gold Bonds be part of your portfolio?

According to World Gold Council, as of 2019 Indian households hold almost 25000 tonnes of Gold. This is valued at a staggering 40% of India’s GDP.

Why are Indian’s so obsessed with Gold?

There is a long interesting history to it. Watch it here.

Here are 2 reasons why it makes sense to invest in Gold

1) Diversification – Gold almost has a negative correlation to the equity markets. When equity markets go up, Gold may or may not go up. However when markets fall and the economy looks extremely weak, Gold has almost always rallied. See chart below.

2) A Hedge against Inflation

The price of 10-gram of gold today is equivalent to the approximate monthly expenses of an average middle-class family. This was true during the time of our parents, grandparents and their parents as well. This rule is generally true across timelines and across global economies too.

Gold is a hedge against the Risk called Inflation. Across a long period of time, it should generally not give a return more than inflation and thus is also called Inflation product.

The long-term return, of gold, has been 9.6% per annum and the average inflation rate in middle-class households has been around 10%.

Watch here to know more about returns from Gold.


What makes Gold not so appealing? 

1) Physical Theft / Loss – Holding / Storing gold is a hassle given that it is bulky and blingy. Banks demand you make some unreasonable investments for a gold locker.

2) Volatility risk – The price of gold goes up and down. In shorter holding periods, investors could make a loss investing in gold.

3) Buying and wearing Gold attracts unwanted attention. (This is just my opinion).

Watch this video to k

now more about the risks involved in holding gold.

How to Buy Gold? 

You can buy coins, bars, jewelry, etc. Or you can buy the Sovereign Gold Bonds.

What are Sovereign Gold Bonds?

Due to the inefficiencies attached to holding gold in physical form, the Government of India introduced Sovereign Gold Bonds (SGB) in November 2015. SGBs are debt securities denominated in grams of gold and are issued by the RBI on behalf of the government. They are denominated in gold and pay a fixed interest of 2.5% to their investors.

SGBs enable one to own gold in a certificate format and are considered to be a safe investment due to Government backing.

Returns-The returns from SGBs are two-fold. Interest and capital gains. Investors get a fixed taxable interest of 2.5% in a financial year. The interest payments are made every six months. The tenure of these bonds is eight years, and the bonds mature after this period at the prevailing price of gold in the market.

Redemption– The redemption proceeds automatically get deposited in the bank account of the investor. However, one can exit the scheme after a lock-in of 5 years. Although the interest earned from SGBs is taxable as capital gains tax, no TDS is deducted.

Should you buy it?

SGBs are low-risk investment options.

Investors get fixed interest bi-annually. This interest rate is lesser than any savings bank rate.

It has a 8-year tenure so liquidity is questionable. But you may find buyers in the secondary market if you want to exit before maturity.

The 3rd Tranche is open for investment until today. Three more tranches are scheduled for July, August, and September 2021.

Final Word :

Gold serves the purpose of diversification and risk reduction. It plays almost no role in wealth creation.

Investing in Gold won’t make you rich, but may not make you poorer too.