SGB PROS
- cheaper than gold
- no GST
- no making charges
- no handling or storage issues
- no physical selling issues
- Price increases with real gold price.
- 2.5% interest (beyond the gold price increase)
- No tax on selling at maturity (8 years)
CONS
- Liquidity can be an issue if needs to sell before maturity
- If sold before maturity, capital gain tax is applicable
- 2.5% interest is taxable as per slab
- Can not see the shining gold
Like all investments, there are pros and cons.
If you're looking to get gold exposure, my suggestion is to go for real gold. Yes, there are some cons to that, no doubt. But that's the case with most investments.
There is a cost to buying a 'real' asset. It's like the choice b/w buying a REIT vs actual real estate. There is a definite hassle in dealing with physical real estate, which you can avoid in REITS. At least in a REIT, it is backed by physical real estate, I digress. But... (pls do your own homework).
I deal with derivative instruments, and I do not recommend it. If anyone is convinced that an SGB is the best exposure to gold, by all means invest.
Anyways, here is some food for thought:
- Why would govt issue SGB, when there are other GSec and Sovereign bonds?
- Why 2.5% vs. 6-7% on other Govt instruments.
- Was it to curb gold import? If there is no physical gold involved, how would this stop imports?
- When you buy SGB, you are lending to the govt, for that they will give you 2.5% (less when you factor in tax). The price of gold can also go down (it doesn't always go up all the time).
You really need to understand the purpose of why the govt introduced SGB to understand the investments benefit.
I'm sure the many moms who buy gold would agree with the super power status of physical gold. As a comedian once said, the ladies are lucky... you can't wear bonds, but you sure can wear gold. 😉
There's some interesting discussions going on at Zerodha's forum, please do check them out:
Yes, but the CAGR of gold price in INR for the past 48 yrs is 12.15%. Add 2.5% to that and you get a whopping 14.65% for an 8 year bond. Just compare this level of interest vs 10yr yield graph. 👇 Gold price chart I generated for this study.👇 Arthapedia article clearly says it is not to...
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This. 🙂 By having a option for pin-pointed tweaking of the Indian economy as desired, by reducing the demand for physical gold whenever necessary, by issuing a new tranche/series of SGBs. This was also discussed recently in this topic-thread. Such a scenario is an actual risk for typical...
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