Investment in Yellow Metal: Gold Bonds vs. Physical Gold

Written on Monday, December 28, 2015
By Vishwajeet Parashar- Senior VP & Group Head - Marketing, Bajaj Capital Ltd.

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The Sovereign Gold Bonds are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. They are linked to the gold price and are thus expected to fetch the investors the same returns as that in case of physical gold. Monetizing gold holdings is among the smartest money moves to make in the New Year.


According to a study conducted by Economic Times, 69% of financial experts said, if liquidity is not a problem, gold bonds is a great way to invest in the metal. The gold bonds offer 275 basis points higher returns than physical gold, leading to compounding benefits. And you don't have to worry about its purity and safety.


There are many valid reasons to consider this investment as:


Value Appreciation: The value of your investment in the gold bond would increase with the increase in gold prices.


Earn Interest: The gold bond gives a better return than the physical gold as it gives interest as well.


Safe: You need not worry about the safekeeping as a gold bond can be kept in digital form.


Paper Investment: You will save the expenses of locker as a gold bond can be kept in your house or Demat account.


100% Purity: There is no chance of cheating or impurities in the gold bond. You would always get 100% pure gold bond, which will give you 100% value, always.


Loan Benefits: If the need arises, you can also take a loan from the bank against the gold bond.


The sovereign gold bonds are neither an investment in physical gold nor any other financial bond. It is a blended product to give you the benefits of both the world. Interest rate is one of the most attractive parts of the gold bond. The interest rate of the gold bond is fixed at 2.75%. Unlike other investments, the physical gold does not give any regular income. You benefit only because of the price rise. If there is no price rise, you will not earn anything. Hence, the interest earned by a gold bond is an added benefit over the physical gold.


The taxation rules on gold bond are very similar to the physical gold and gold ETF. There is no clause of exempt yet. If an investor decides to sell it before 3 years, short term capital gain tax is applicable at 0-30%. But if sold after 3 years, long term capital gain tax at 20% is applicable along with indexation benefits.


Though these bonds are issued by RBI, but they are not 100% risk free. If the gold market slumps, the effects will also get visible on bonds but yes the default risk is very negligible as being issued by RBI, they carry a sovereign guarantee.



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