Recently, a set of Sovereign Gold Bonds or SGBs issued by the RBI in 2016 matured and investors earned a return of about 15% per cent per annum. This has sparked a lot of interest in SGBs, with people asking whether they should invest in the SGBs that are open now. This is a good time to give the disclaimer “Past performance is no guarantee of future returns”.  

Hi, I’m Aarati Krishnan and in this episode of Question of Money, I’m going to talk about SGBs, where they get their returns from, and how they compare to other ways of investing in gold.  

What are SGBs? 

Sovereign gold bonds or SGBs are borrowings by the Government of India which are denominated in the Indian price of gold. SGBs deliver returns in two ways. One the government pays you a 2.5% interest on your capital invested in SGBs every year. Two, you buy SGBs based on the current price of gold in the market, and you get to exit them after 5 years or 8 years at the price of gold at that time. Suppose you buy the February 2024 tranche of SGBs at the price of Rs 6263 per gram, you will get Rs 15.65 every year as interest. At the time of maturity of the SGBs if gold prices have gone up to say, Rs 12,000 per gram, your SGBs will get redeemed at that price, delivering an annualised return of 8.4 per cent.  

Can you be certain that gold prices will be at Rs 12,000 per gram in 2032? You obviously can’t. Therefore, the returns of past tranches of SGBs cannot be extrapolated into the future.  

Apart from how they get their returns, there are two other features of SGBs you need to be aware of. One is that they can be bought only during the limited windows of time that RBI issues a new series. Two, you can exit them only when RBI redeems them. RBI opens a buyback window for SGBs five years after the date of each offer and fully redeems them 8 years from the date of offer. If you want a guaranteed exit from SGBs, these are the times you can get it. At other times, SGBs are traded on the exchanges, and you can try to sell them. But as liquidity can be dodgy and prices may be way off market prices, exit through the secondary market is not a given.  

Return expectations  

The return from SGBs really depends on what kind of returns gold delivers for Indian investors. Now many people think that gold prices can go only go one way- Up. This is simply not true. Gold returns in India mainly depend on two things - how global gold prices move and the Rupee depreciating against the US dollar which makes imports costlier.  

Global gold prices usually shoot up when there’s a crisis – threat of a war, an oil crisis, worries about a financial or banking collapse, hyper-inflation. If there’s no calamity on the horizon, gold tends to move sideways or even decline. In fact, looking at the rolling returns of gold from 1990 tells us that gold has made losses in about 20% of the years. It has also delivered returns of less than 10% about 30% of the time.  

So there’s a fairly high chance of gold not getting you to a 10% return. Over the long-term, gold returns in India have averaged 8-9% a year. For Indian investors, part of those gold price returns also come from the Rupee depreciating against the US dollar. Over the last 30 years or so, the Rupee has depreciated 3-4 per cent a year on an average, against the dollar. This has added to domestic gold price returns. Whether this kind of Rupee depreciation will continue in future is uncertain.    

Gold versus stocks and bonds 

Is gold superior to investments in stocks or bonds? Both in stocks and bonds the long-term trend tends to be upwards because stock prices are backed by company profits, and bonds are backed by interest payouts which come in regularly. Gold has no profits or cash flows backing it. Therefore, its returns are purely a function of demand and supply. However, in the long run gold prices have tended to move up because of inflation and demand for it from central banks as a hedge against risks.  

You too should be buying gold for the same reason- portfolio insurance. Gold generally performs well when other assets like stocks or bonds are tanking. But just like insurance premiums cannot eat up all your savings, investments in gold cannot be a major part of your long-term portfolio.  

A 5-10% allocation is enough, if you own risky assets like equities. The other reason many Indians own gold is to fund jewellery purchases and wedding gifts.  

Can’t you just own jewellery or gold bars for weddings? Owning gold in digital form is better because you don’t incur making charges, wastage etc and need not sell your gold at a discount when you want to cash out.  

For this reason, the only other wise way to invest in gold is through gold Exchange Traded Funds which are a type of mutual funds, listed on the stock exchange that track gold prices. Gold ETFs can be bought and sold anytime unlike SGBs. So, you can time your buys to gold price lows and sales to highs. But SGBs score over ETFs on taxation. The capital gains you make on holding SGBs until maturity is tax exempt. But the capital gains you make on gold ETFs can be taxed as short-term capital gains at your income tax slab rate. SGBs obviously let you keep more of the gold price gains for yourself instead of sharing it with the taxman. 

(Host: Aarati Krishnan, Producer&edits: Anjana PV, Camera: Bijoy Ghosh & Siddharth Mathew Cherian)