As the inflation concerns amplify around the globe, we are seeing the buying power of money diminishing. Moreover, as the stocks are falling to the floor, new investors are learning an important lesson in asset allocation. A diversified portfolio with proper asset allocation can help you mitigate the risk of your equity-heavy portfolio blowing up during times. Moreover, it can also save your corpus from being eaten away by the soaring inflation.
We Indians have always been big on the yellow metal. However, traditionally it has always been seen as a financial buffer rather than an investment vehicle. Richard Davies writes in his book, “Gold also acts as a kind of informal insurance mechanism.” We in India have a solid informal system where, in case of emergencies, Gold can be exchanged for cash. But now there is a realisation that when you need protection for your portfolio from a global financial or geopolitical crisis, Gold is a solid option to diversify your investment as well. It seems our ancestors and elders were ahead of their time, weren’t they? Gold is one of those asset class which isn’t correlated with any other asset class, being an ideal shield against capital erosion. So, if one is looking for diversification, investing in Gold is a good option. And the experts say - Sovereign Gold Bonds, or SGBs, are one of the best ways to do that.
Source: RBI Website
Sovereign Gold Bonds or the SGBs
The Government launched the Sovereign Gold Bond Scheme in November 2015 as an alternative to physical Gold. Gold bonds fall under the debt fund category. And as these bonds are sovereign-backed, insulated from market risks and volatility, they are very much a secured investment and a viable alternative to physical gold. Sovereign Gold Bonds are denominated in the multiples of a gram of Gold with the minimum unit of 1 gram.
Source: AffairsCloud.com
SGBs are issued by the Reserve Bank of India on behalf of the Government of India in tranches yearly. You’re reading this at the right time as the subscription of the first tranche of SGBs for the 2022-2023 series 1 started on 20th June 2022, and will be open till 24th June. The date of issuance has been set for 28th June 2022.
You can find out about these announcements by visiting RBI’s official website, the link for which is: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11864&Mode=0. And if you miss this, there’s always the next time!
The objective behind this scheme was to reduce the demand for physical Gold and shift part of the domestic savings used for purchasing physical Gold into financial savings. Anyone who subscribes to and purchases SGB receives a holding certificate in their name.
Let us understand some of the features of the Sovereign Gold Bond:
The main advantages of investing in Sovereign Gold Bond funds are:
Conclusion
Investing in the Sovereign Gold Bond scheme can be a prudent investment decision given its widespread benefits. An investor who intends to create long-term wealth but is risk-averse should have around 10-15% of their asset allocation invested in this scheme. Sovereign backing, diversification, hedge against inflation, stable returns and fixed income payouts etc., are some good enough reasons to invest.
We updated the article after seeing that the source we had rereferred to for tax benefits was inaccurate. The article is now updated now.
The change was related to Tax Benefits. Only after maturity of the gold bond, an investor can enjoy tax free capital gains.