The Sovereign Gold Bonds (SGB) 2023-24 Series III is now open for subscription. Investors can subscribe for the same between December 18 and 22.

The Reserve Bank of India has set the issue price at ₹6,199 per gram of gold, with a ₹50 per gram discount for online applications, resulting in a discounted price of ₹6,149 per gram. Investors will receive 2.5 per cent interest on the issue price, paid semi-annually.

The minimum purchase is one gram, while the maximum limit for an individual is 4 kg per financial year. Given the recent surge in gold prices, is it advisable to subscribe to the latest series? Below is our take.

Price rally

The yellow metal’s latest price surge began in October this year, reaching a record $2,136 per ounce in dollar terms in early December, before easing to the current $2,025. The year-to-date return is approximately 11 per cent.

Similarly, in the domestic market, MCX gold futures, currently at ₹62,100 (per 10 gram), have gained nearly 13 per cent, despite a decline from May to September.

Higher prices have resulted in an attractive premature redemption price for SGBs issued on December 18, 2017. Investors who redeemed the bonds using this window on December 18, 2023, would have fetched a pre-tax return ( XIRR) of 15.9 per cent over the past six years. 

Comparatively, the Nifty Total Return index in the corresponding period returned 14.2 per cent. Other gold investment vehicles, including gold ETF and gold futures, have produced a pre-tax return of 12.7 and 13.6 per cent, respectively, for the same period.

The first ever tranche of Sovereign Gold Bonds (SGBs) issued on November 30, 2015 (SGB 2015-16 Series I) matured after eight years on November 30. At a maturity price of ₹6,132, this tranche yielded a return of nearly 13 per cent( XIRR, pre-tax).

SGBs are a viable long-term investment product for investors. Also, allocating about 10 per cent of your portfolio to gold is advisable as it serves as an effective diversifier, due to its uncorrelated nature with most assets. Especially now, when economic and geopolitical uncertainty is keeping the uncertainty wheel running.

Thus, subscribing to the current series is recommended.

Series comparison

Compared to the current series, older series that are available in the secondary market can sometimes give you the same or better value. The YTM (yield-to-maturity) of three series are now nearly 2.5 per cent, which offers the same value as the new series. These are : 1) listed on  October 12, 2023 (matures in September 2031), 2) listed on July 11, 2023 (matures in June 2031) and 3) listed on September 1, 2016 (matures in August 2024).

However, the quantity available and current market liquidity means, investors can only buy limited quantities before the spread hits the value the bonds offer now. To avoid these risks, investors can subscribe to the 2023-24 Series III SGBs.

Pros

SGBs are issued by the RBI and are backed by the government, giving investors safety. They can be held in dematerialised form, so investors need not worry about storing it, unlike physical gold. Besides, one will receive an interest payment of 2.5 per cent bi-annually, augmenting the total return.

Additional benefits encompass capital gains exemption upon maturity or premature redemption at RBI’s call. SGBs are accepted as collateral for loans by the banks. You can be sure of allotment if you meet the eligibility criteria.

Cons

A 5-year lock-in exists for subscriptions to new issuances. But if SGBs are held in dematerialised form, it can be sold before five years in the secondary market. Here, note that you will not be eligible for capital gains exemption.

Besides, you might face poor liquidity in the secondary market, leading to a lower-than-expected fair price. This can weigh on the overall return. Hence, SGBs may not be suitable for short-term investments.

However, you will not face such liquidity issues if you opt to exit through the premature redemption window that RBI opens after five years of an issue. If you choose to hold the bonds till maturity (eight years), capital gains are exempt from tax. So, as a long-term investment vehicle, the advantages of SGBs significantly outweigh the disadvantages.

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