Sovereign Gold Bonds: SGB investments have returned an average 13.7% over last 8 years (2024)

Mumbai: Sovereign gold bonds (SGBs) have worked well for investors in the past eight years of their existence. Investments in 66 tranches of these instruments issued by the government have yielded an average of 13.7% on an annualised basis since November 2015. Wealth advisors said the run-up in gold prices in this period amid increase in uncertainty over the global economy have boosted returns from this product.

An ET study of SGB returns shows investors who put money in each of the 63 issuances would have earned between 4.48% and 51.89% annualised depending on when the investment was made. These returns exclude the 2.5% interest that the government pays for holding the bond.

The earliest investments made the maximum returns. For instance, investors subscribed to the first eight-year issue of SGB in November 2015 at a price of Rs 2684 per gram of gold. Currently the price of gold is Rs 6017 per gram. That tranche, which will come up for redemption in November this year, has returned about 125% so far. Investors will get back their money based on the price of gold then. One SGB is equivalent to 1 gram of gold with an upper limit of 4 kg in a financial year.

Several rich investors have put money into SGBs because of the tax advantages compared to gold funds or ETFs

"Capital gains are tax free on maturity after 8 years," says Anup Bhaiya, MD and CEO, Money Honey Financial Services. "Moreover, the government pays you 2.5% interest on the value of the bond, while there is no expense ratio to be paid or issue of purity and there is liquidity through listing and buyback.

Other gold instruments gains are taxed in line with an individual's tax slab, which could mean a tax of 30% for rich investors.

Investors can buy SGBs through public issues announced by the government. Investors can also buy SGBs listed on the stock exchange, with some of them trading at a discount to the current price of gold. However, volumes are thin, and negligible in many of the issues.

While there were four issuances by the government in the previous financial year, there has been no announcement for fresh issues of SGB so far this year.

Investors have been buying gold amidst an uncertain global environment where there have been a series of rate hikes and there is a chance of a recession in the US. While gold prices have moved up by 14% in the last one year, the yellow metal has returned 7.17% in the past three years, 12.89% in five years and 6.87% in 10 years.

"A pause in the Fed's hiking cycle, which is likely in the foreseeable future, will be supportive of gold prices. An eventual cut in interest rates to support economic growth or calm financial market panic, the timing of which remains uncertain as of now, will be bullish for gold prices," said Ghazal Jain, Fund Manager, Quantum Mutual Fund.

Jain advises purchasing gold in a staggered manner in order to average out the purchase costs, and always hold at least 10-15% of the investment portfolio in gold.

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