Retirement planning is an important part of a good financial plan to secure your future and live a healthy after-retirement life. Investing in the future is critical to addressing medical bills, achieving retirement goals, maintaining lifestyle, reducing stress, ensuring financial independence, and accounting for inflation.
At a younger age, when you earn money, it's your responsibility to save and invest some part of your income in a secure and lucrative investment. Out of so many options available today, sovereign gold bonds are one of the most profitable and secure investment options to incorporate in your retirement financial planning. SGBs are highly prospective investment options as they not only offer income but are also a risk-averse option due to minimal capital risk and easy liquidity. In this blog, we will discuss what are SGBs and their benefits to help you incorporate them into your retirement planning.
What are Sovereign Gold Bonds?
To incorporate SGBs in your retirement planning, it's important for you to know what they exactly are. Sovereign Gold Bonds are government securities issued by RBI during specific periods of the year. They are issued against the grams of gold for a tenure of 8 years. SGBs are the best alternative to physical gold, allowing you to invest in gold without dealing with its physical shape and the risk of theft and loss. SGBs provide an extra 2.5% interest on the gold price appreciation, which is observed as 11%.
Investing in gold in the form of SGBs is a great option as their prices rise with time, therefore increasing your investment value, profits, and returns. They offer tax benefits due to capital gain, which has a low tax rate, ultimately reducing the cost of your investment. These bonds offer capital appreciation as well as a good amount of interest every year, making it a valuable investment for retirement years. You can use the Sovereign Gold Bond calculator to explore the potential returns according to the principal amount and investment options.
Incorporate Sovereign Gold Bonds in Your Retirement Planning
There are many investment options to add to the financial plan for retirement, then why sovereign gold bonds over others are a common question. Have a look at some exceptional benefits of investing in SGBs and how you can incorporate it:
Average Annual Return
Over the last eight years, SGBs have produced an average yearly return of around 13.7%. This means the current interest rate, 2.5%, plus the capital appreciation resulting from gold price fluctuations, is included in it. The interest of 2.5% pa on your initial investment is paid twice a year (every six months) until maturity to your account. During retirement, this interest amount can serve as a regular source of income to handle and manage living and medical expenses.
Capital Appreciation
Gold prices are not influenced by the prices of other bonds and stocks, currency devaluation, or stock market turmoil. For years, gold has shown a positive performance as its prices are continuously rising, thus contributing to capital appreciation. So, if you sell your SGBs on the secondary market, you will receive a much higher amount than many other investment options. Access your portfolio first to evaluate your asset allocation and risk tolerance. If your portfolio is filled with bonds and stocks, SGBs are an interesting option for diversifying it.
Long Term Investment
Sovereign Gold bonds have a holding period/tenure of 8 years making it one of the best investments for the long term with the aim for extensive capital gain and corpus security. However, it also provides an option to exit from the 8-year bond in the 5th year, 6th year, or 7th year. Therefore, in case of any financial emergency, you have the option to exit the bond and get a good amount to deal with the situation. Its long-term nature aligns it with retirement planning goals, allowing you to accumulate wealth over time and get capital appreciation benefits.
Tax Benefits
Tax payments reduce the profit of investments and eat your returns. However, SGBs are an exception in that case. The capital gains arising on the redemption of SGBs are tax free which means it exempts you from paying the tax on redemption. This saves a substantial sum of money that would have otherwise been allocated to tax payments. When there is no tax payment, the after-tax returns also increase. The tax benefits are applicable only when you hold the SGB till maturity, therefore always consider SGBs as your long-term investment for retirement rather than short term trading.
Loan Facility
SGBs give investors more financial freedom as they can be used as collateral to secure loans from financial institutions. According to the RBI's LTV standards, any scheduled financial institution may lend up to 75% of the market value of such bonds. Therefore, in times of financial crises, you don't even have to sell the SGBs; you can simply mortgage them and get money.
Hedge Against Inflation
When inflation happens, the purchasing power of people goes down, leading to economic distress and financial pressure. In such a situation, SGBs act as a hedge against inflation as their prices soar up more than the prevailing inflation of the country. By selling SGBs during that time, you can get a considerable amount of money to shield your portfolio, protect your purchasing power, and survive inflation.
Liquidity
SGBs are listed and traded in the open market on the stock exchange, so they have higher liquidity than many other options. This makes them most aligned with your retirement plans and risk tolerance. You can easily buy and sell SGBs on the stock exchanges whenever the need arises without depending on any third party or broker. This gives you the flexibility and convenience to access and use funds when required.
Conclusion
In conclusion, we can state that SGBs are one of the best investments in your retirement planning due to various reasons such as liquidity, capital appreciation, long-term investment nature, tax benefits, annual returns, etc. To incorporate it properly, understand SGBs deeply and then access your portfolio, risk tolerance, and investment nature to make an informed decision. If you are still confused about incorporating them, it's always best to consider a financial advisor to help you determine the correct allocation to SGBs.
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