Are SGBs a wise investment choice for seniors citizens? (2024)

The past eight years have proven to be notably favourable for SGBs, showcasing their capacity for providing both consistent income and capital appreciation. Let’s delve into a detailed examination of their performance:

Average annual return: Over the past eight years, SGBs have yielded an average annual return of approximately 13.7%. This comprises the assured 2.5% interest income along with capital appreciation linked to fluctuations in gold prices.

Capital appreciation: The value of gold has demonstrated an upward trajectory in recent years, significantly contributing to the capital appreciation of SGBs. For example, the initial issuance of SGBs in 2015 has witnessed a substantial absolute price increase of around 128.5% by November 2023.

Comparison with alternative options: While lacking the flamboyance of certain equity investments, SGBs have surpassed the performance of bank fixed deposits and presented relatively steady returns amidst market volatility. This makes them an especially appealing choice for risk-averse senior citizens in search of dependable income and enduring value.

The decision for senior citizens to invest in SGBs hinges on their unique circ*mstances and risk tolerance. Past performance does not guarantee future outcomes. The volatility of gold prices and market conditions introduces the possibility of fluctuations. Additionally, taxation considerations come into play. Although capital gains enjoy tax-free status at maturity, the interest income is subject to taxation based on the individual’s income slab.

Is it advisable for senior citizens to consider investing in SGB?

The safety of the principal amount is a critical aspect to take into account. In this regard, any assured scheme providing a fixed return surpassing the guaranteed 2.5% interest of SGBs would provide a greater level of protection for the principal in the short to medium term. Nevertheless, the decision is not always a straightforward one.

Investing in guaranteed schemes offers the following advantages:

Enhanced guaranteed returns: Certain guaranteed schemes provide returns surpassing 2.5%, ensuring absolute capital protection and the potential for increased profits.

Shorter lock-in periods: Some schemes come with shorter lock-in periods compared to the eight-year tenure of SGBs, allowing for earlier access to invested capital.

Minimal risk of price fluctuations: With no exposure to gold price volatility, these schemes offer predictable returns without the uncertainty associated with fluctuating prices.

Nevertheless, investing in guaranteed schemes comes with its drawbacks. The disadvantages of allocating funds to such schemes encompass:

Lower potential returns: Fixed returns, when contrasted with long-term gold price appreciation, may not surpass inflation or result in substantial growth.

Interest rate risk: Certain schemes are vulnerable to fluctuations in interest rates, which could potentially affect overall returns.

Limited liquidity: Options for early withdrawal may be constrained or subject to penalties, limiting the flexibility of accessing funds.

Senior citizens who are inclined to invest in SGBs are motivated by:

Government guarantee: SGBs are supported by the Government of India, assuring minimal default risk.

Potential for capital appreciation: With a historical tendency for gold prices to rise over the long term, SGBs offer the potential for profits beyond the guaranteed interest.

Tax benefits: While interest income is taxable, the tax-free status of capital gains at maturity makes SGBs attractive for senior citizens, especially those in lower tax brackets.

Hedge against inflation: Gold has a historical track record of serving as a hedge against inflation, potentially preserving the value of the investment.

Yet, senior citizens should also consider the drawbacks of investing in SGBs. It’s not all smooth sailing when it comes to allocating funds to the gleaming yellow metal that captivates investors.

Reduced assured returns: The 2.5% interest may not be as appealing as certain guaranteed schemes offering higher fixed returns.

Extended lock-in duration: The eight-year tenure imposes a substantial restriction on accessing invested capital for an extended period.

Vulnerability to gold price fluctuations: Short-term declines in gold prices can result in temporary paper losses.

Should SGBs figure in senior citizens’ investment options?

The decision between investing in SGBs or opting for guaranteed schemes hinges on numerous factors. Evaluating these factors is crucial, and it is beneficial for individuals to assess them thoroughly before determining which option is likely to yield better returns in the short, medium, and long term. These include:

For ensuring absolute capital protection in the short to medium term: Give preference to guaranteed schemes offering higher fixed returns and shorter lock-in periods.

For long-term wealth creation with potential inflation protection: Contemplate investing in SGBs if you possess a more extended investment horizon and can withstand fluctuations in gold prices.

For a well-rounded strategy: Diversify your investment portfolio by incorporating both guaranteed schemes and SGBs, aligning with your risk tolerance and investment objectives.

Considering your unique circ*mstances and risk tolerance is crucial for making well-informed investment decisions. If you are unfamiliar with the advantages and disadvantages of different investment options, consulting a personal advisor can be invaluable in providing expert guidance.

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Published: 22 Dec 2023, 11:02 AM IST