The Sovereign Gold Bonds (SGBs) issued on February 8, 2016 (SGB 2016-I) matured on February 8, 2024, and the premature redemption window for another series – the SGB 2016-17 Series I issued on August 5, 2016 – was opened by the Reserve Bank of India (RBI) on February 5, 2024.

Both series offered the same price of ₹6,271 per unit for redemption. The issue price of SGB 2016-I and SGB 2016-17 Series-I was ₹2,600 and ₹3,119, respectively. The former yielded a return of 15.4 per cent on maturity after eight years, while the latter returned 13.5 per cent for premature redemption, calculated using the XIRR method, including the interest received.

Superior returns

In terms of returns, both SGB series outperformed other gold avenues during the comparison period. SGB 2016-I achieved a return of 15.4 percent between February 8, 2016, and February 8, 2024. It surpassed the 9.8 per cent returns of gold ETF (represented by Nippon Gold BeES, which has the highest AUM) and MCX gold futures (10.3 per cent returns). However, the Nifty Total Returns index appreciated by a slightly higher 16 per cent during this period.

Similarly, SGB 2016-17 Series-I yielded a 13.5 per cent return between August 5, 2016, and February 5, 2024, while gold ETF and MCX gold futures returned 8.3 per cent and 9.7 per cent, respectively. The Nifty Total Returns index gained 14.4 per cent. SGB 2016-17 Series-I is set to mature on August 5, 2024.

It’s important to note that all the mentioned returns are pre-tax.

Good portfolio diversifier

SGBs, with double-digit returns, serve as an effective hedge against inflation. Besides, the returns have been competitive, going by the two tranches that have matured so fa.  There have been periods of gold price dips - particularly noticeable between July 2020 and March 2021 - where MCX gold futures decreased about 17 per cent before recovering in subsequent years. But over the long term, gold can serve as a valuable diversifier due to its low correlation to other asset classes. So, investors can allocate 5-10 per cent to gold in their portfolios.

SGBs, being low-risk and tax-efficient, provide additional benefits such as safety, exemption from capital gains on redemption and maturity, and interest income, which augment the total returns. They can also be held in demat form. Interest income on SGBs, though, is taxable at slab rates.

However, investors should know the five-year lock-in period, even though the bonds’ tenor is eight years. Exiting outside the RBI redemption window may not be easy due to the illiquidity of the secondary SGB market, making them less ideal for short-term investors. Nonetheless, the government-backed security, along with tax benefits and the convenience of demat holding, make SGBs an attractive investment option.

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