Gold bonds are a lucrative alternative to investing in physical gold. This article explains how they benefit you.
Gold has always held a fascination for Indians. The precious yellow metal is expensive and considered as the highest pinnacle of purity. It is bought and gifted during auspicious occasions. Also, it is a lucrative investment option since you can borrow money against it or sell it in case you have financial difficulties.
But buying gold has its drawbacks, and most of these stem from security issues. Gold is vulnerable to theft, so keeping it at home is out of the question. Besides, you have to pay making charges and GST when you buy readymade gold jewellery or biscuits. Instead of investing in physical gold, why not invest in sovereign gold bonds?
What are sovereign gold bonds?
The gold bond scheme or sovereign gold bonds are essentially Government-issued securities in terms of gold, in that, they form substitutes for physical gold. When you buy a gold bond, you are essentially paying the issue price in cash. The sovereign gold bond is issued by the RBI, but only designated banks, financial institutions, stock exchanges and agents may issue the bonds to customers.
They currently pay a gold bond interest rate of 2.5% annually, and they offer the same returns as physical gold. However, investing in the gold bond scheme is a much superior alternative to investing in physical gold because –
* You don’t need to store physical gold anywhere – just buy a gold bond. The inherent risks associated with buying and storing physical gold, such as theft or investing in a bank locker, are absent with gold bonds.
* Your investment is always protected and backed by market forces. The money you pay towards investing in the gold bond scheme is protected, i.e. you receive the market price for the gold whenever you wish to redeem the bond or when it matures. You also get periodic interest on the same. The bond is held in the bank books in demat form so there is no loss of scrip either.
* You can invest heavily in the gold bond scheme, but there are limits. Most experienced investors will certainly buy into the gold bond scheme, but not to a high degree so that they can invest in other asset classes for more diversification. Even if you wish to keep investing in gold bonds, you may not – there are limits prescribed by the RBI. You may subscribe to a maximum of 4 kg gold as an individual and 20 kg for trusts and other associations. The gold bonds can be subscribed for 1 year, 3 years and 5 years in most cases at a projected gold price appreciation of 10%.
