Is it worth investing in Sovereign Gold Bonds?

What are Sovereign Gold Bonds? Is it worth investing in them?
- Megha Agarwal

I am not a believer in gold as an investment avenue. This is due to understandable reasons as all broader asset classes, equity, debt and real estate, have some basis to them. When you invest in equity, you get ownership. When you invest in debt, you are lending your money and somebody else is putting that money to work and that is why you are getting the interest. Real estate too, either you are consuming it by living in that house or you are renting that house. But gold as an asset just sits in your locker and the appreciation is entirely dependent on more people demanding or needing gold or aspiring to have gold in the future. It is the only asset class with the longest history that has emerged of late in the financial form.

So I would say that if at all for some reason you are committed to having gold, then the Sovereign Gold Bonds (SGBs) are the finest way of having it because these are issued by government of India and if you believe that the government of India will honour all its commitments, then these bonds will be honoured. Its price appreciation or depreciation is linked to the gold prices and you get little more returns than gold because you get about 2.5 per cent more than the gold prices. Also, if you hold it for the entire term, which is eight years, then all the gains are also tax free. So the tax treatment and the extra returns that SGBs offer is superior to other forms of gold.

Moreover, the ownership of other forms of gold costs money. For instance, if you own jewellery, there will be substantial making charges. Thus, if you buy jewellery worth Rs 100, its actual worth will not be Rs 100 but rather Rs 84 and the ability to realise it will depend on the degree of purity. Likewise, when it comes to coins and other things, I really wonder what happens at the liquidity side of it, your ability to realise it when you need the money. However, in the case of SGBs, it's different. Of course you are compromising on the liquidity but there is an interim liquidity which is available and you can sell these bonds in the market.