The first ever tranche of Sovereign Gold Bonds (SGBs) issued on November 30, 2015 (SGB 2015-16 Series I) will mature after eight years on November 30. Also, the Reserve Bank of India (RBI) opened a premature redemption window for another series – the SGB 2017-18 Series IX issued on November 27, 2017 – last week.
The maturity price of SGB 2015-16 Series I (issue price of ₹2,684) is yet to be known whereas the premature redemption price offered by the RBI for SGB 2017-18 Series IX (issue price of ₹2,914) is ₹6,142 per unit of SGB.
Assuming the same price for both the series, the former will have produced a return of 12.9 per cent on maturity. The latter returned 15.2 per cent. Marginally higher coupon led to SGB 2017-18 Series IX giving better return. Returns have been calculated using XIRR method by including the interest received).
Higher return
The return on maturity of the 2015-16 Series I of 12.9 per cent is better when compared to other gold investment avenues. During the same period, gold ETF (Exchange Traded Funds) have fetched 10.9 per cent whereas gold futures on the Multi Commodity Exchange (MCX) appreciated 11.8 per cent.
Even the Nifty Total Returns index, by gaining 13.5 per cent, only marginally outperformed this tranche of SGB. Importantly, the capital gains arising on maturity of SGBs are exempted from tax. So, the post-tax return will be even better in SGBs. The proceeds of maturity/redemption will be credited to the bank account furnished by the investors while applying.
Investors who opted for premature redemption of SGB 2017-18 Series IX after holding for six years would get a return of 15.2 per cent. This is higher versus the 12 per cent return of gold ETF during the corresponding period. Also, this is better when compared with gold futures on the MCX, which had appreciated 12.9 per cent in the period of consideration.
Long-term focus
Gold is a great inflation hedge. And, as seen in SGBs’ record over the past eight years, returns are quite competitive and much better than that of fixed income options and comparable to equities. Of course, there can be years at a stretch when gold prices can go south. But over the long term, you must allocate 5-10 per cent of your overall portfolio to gold as a part of your overall asset allocation. SGBs are both low on risk and tax-efficient.
There is a lock-in period of five years though the tenor of these bonds is eight years. Besides, if investors opt to exit apart from the RBI redemption window, it might not be easy as the secondary SGB market is not very liquid. So, for short-term investors, SGBs might not be ideal.
But there are other advantages like safety as they are backed by the government, have exemption from capital gains and the interest income which augments the total return. Also, SGB can be held in demat form.