The Reserve Bank of India (RBI) has declared the final redemption price of the inaugural tranche of the Sovereign Gold Bond (SGB). The SGB 2015-I tranche, initiated in 2015, is due for redemption on November 30. This initial issuance of SGBs attracted investments worth Rs 245 crore, according to data released by the RBI.
After the eight-year tenure, these bonds are set to mature. So, evaluating the returns these bonds have provided through their lifespan is crucial.
At the time of their issue, the price of gold was Rs 2,684 per gram. This was significantly nominal due to less fluctuation in gold prices at that period. Individuals who invested in this tranche were provided an opportunity to earn a return of 2.5% per annum, payable semi-annually on the nominal value and participate in the potential appreciation of gold’s market price. This sets a favourable environment for profit if the investor intends to hold till maturity.
“The first tranche of SGB was issued in November 2015 at Rs 2,684 per gram. The redemption price of this tranche is Rs 6,132. Additionally, investors also received 2.5% per annum interest on their holdings. Therefore, for someone in the 30% tax bracket, the tranche has delivered 12.28% CAGR over 8 years. An assumption here is that the interest was also reinvested in the SGBs. The post-tax returns are better than many actively managed large-cap mutual funds when compared on a rolling returns basis. This proves that SGBs are a good investment that cushions against market volatility. Based on the risk appetite and financial goals, retail investors can have up to 10% of their portfolio put into gold via SGBs,” said Ajinkya Kulkarni, Co-Founder and CEO of Wint Wealth.
Also read: Sebi approves framework for small and medium REITs. What does it mean for fractional ownership?
Also read: Can LIC maintain its lead in the insurance industry? Share price soars 10%
The returns bear testament to gold’s potential as a secure investment in tumultuous times and the attractiveness of SGBs as an investment vehicle. As more tranches reach maturity in the future, investors will have more reasons to consider and rediscover gold in their asset allocation strategy.
However, despite the popularity of SGBs, one should also understand that this does not automatically qualify gold as an attractive investment option. In retrospect, gold has presented decent returns over the past decade. As of November 24, the value of the precious metal has grown by 11% (in one year). In contrast, the Sensex has grown at a substantially higher rate of approximately 12 per cent over the same period.
While it is important to understand that gold does not always offer substantial returns, choosing SGBs rather than physical gold would be wiser if you are adamant about investing in gold. SGBs provide a secure mode of investment and yield higher overall returns. They offer an annual interest of 2.5 per cent to investors, which is payable semi-annually. Moreover, these bonds are more liquid than physical gold and can be bought or sold through stock exchanges. They also eliminate the risks and costs associated with the storage and purity of physical gold.