How sovereign gold bonds outshine other asset classes

Dhuraivel G Updated - May 04, 2020 at 12:28 PM.

They pay a fixed interest, offer good IRR, come with discounts and are tax-efficient

Those who have invested in the sovereign gold bonds (SGBs) issued over the past five years have a reason to smile. The prices of these SGBs have grown significantly and delivered handsome returns to investors.

For instance, the money invested in the first ever issue — SGB-2015-Series-I, launched in November 2015 — has appreciated about 84 per cent so far (as on April 27). Similarly, SGB 2019-20-Series-I, which was launched in June 2019, has gained around 48 per cent.

 

SGBs were first launched in November 2015 and have been sold in 38 tranches subsequently by the RBI. They score over other gold investment options as they pay a fixed interest on the holding (2.5-2.75 per cent per annum) apart from the discount of ₹50 on the issue price if invested online. They are tax-efficient too, as the capital gains are tax-exempt if they are held till maturity (eight years).

Vis-à-vis other gold products

The yellow metal started its upward journey in mid-2019 on the back of an escalating US-China trade war and accelerated thereafter due to the economic uncertainty and fears of a virus-led global recession. Over the past year, gold in rupee terms has appreciated 48 per cent while other asset classes such as equity and debt have struggled to hold their head above water. The Nifty 50 TRI plummeted 15 per cent over the period.

SGBs outperformed other modes of investing in gold, such as gold ETFs and e-gold, by a wide margin, thanks to the coupon payments that offer additional returns apart from the appreciation in gold price. Further, retail/online investors are offered a discount of ₹50 in the issue price.

 

 

For instance, SGB-2016-Sr.-I, launched on February 8, 2016, has so far appreciated 89 per cent (including coupon payments) while gold ETFs (the average of the top three gold ETFs in terms of traded volume) have gained 61 per cent. Meanwhile, gold price in rupee term (source: gold.org) rose 62 per cent. This particular SGB series has made a total coupon payment of ₹286 since its launch.

The annualised performance of this SGB, as measured by XIRR (used to calculate the internal rate of return when the investment fetches periodical payments), was 17 per cent, while gold ETFs on an average generated 12 per cent annually.

How to buy SGBs

Gold has been a hedge against market uncertainties. It can form part 5-10 per cent of your portfolio at any point of time.

Investors can buy SGB units from the primary issuances announced by the RBI from time to time. Recently, the RBI announced the FY21 issue calendar for SBGs, coming out with the first tranche from April 21-24. The second tranche will be conducted on May 11-15, 2020.

Investors can also buy SGB units from the secondary markets, on the BSE and the NSE. Of 37 series of SGBs, 12 have been traded with daily average volume of 100 or more units on the NSE.

For detailed data on SGB series, visit thehindubusinessline.com.

Published on May 3, 2020 16:33