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Sovereign Gold Bonds’ (SGBs) first series for the current financial year was announced by the Reserve Bank of India (RBI) last week. Investors can subscribe for the 2023-24 Series I until June 23. The bonds, to be issued on June 27, will have a maturity period of eight years.
RBI has fixed the issue price at ₹5,926 per gram of gold, with a discount of ₹50 per gram for applicationsmade online. Investors will get 2.5 per cent interest on the issue price, paid semi-annually. While one can buy as little as one gram, the upper limit is 4 kg per fiscal for an individual.
Should you subscribe to the latest series, considering that gold prices haves fallen of late? Below is our take.
Play long-term
Gold has been on the decline since mid-May when US inflation started showing strong signs of cooling. This led to a dollar rally, which weighed on the yellow metal. In dollar terms, gold ($1,950) is now down by over 6 per cent from its peak and similarly, in the domestic market, the gold futures contract (₹59,250) on the Multi Commodity Exchange has dropped nearly 4 per cent.
At this juncture, there are uncertainties over the direction in which gold prices could move. However, note that this uncertainty is only for the short-term. When you consider the bigger picture, say over five years, prices are likely to be higher. Historically, gold has been a good asset to invest in in the Indian context and has even outperformed equities, sometimes over long periods. In the short-term, there are a lot of uncertainties on global economic growth, which can keep gold prices afloat.
Therefore, investors can take a long-term exposure to gold, and SGBs can be the best avenue, especially when you are looking to hold for over five years. Besides the scope for capital appreciation, investors also get an annual pay-out of 2.5 per cent on their investment.
Last week, RBI opened the window for premature redemption of SGB 2017-18 Series XII, issued on December 18, 2017, for ₹2,890, before the discount of ₹50. It was redeemed on June 17 for ₹5,926. Thus, the annualised return, including all the interest payment received, stood at nearly 16 per cent. Consequently, it has outperformed the 13 per cent return of the Nifty Total returns index.
Historically, SGBs’ returns have been better than returns from gold ETFs and gold futures.
So, gold could account for about 10 per cent of your overall portfolio, irrespective of market sentiment. Since the precious metal is uncorrelated to most assets, it is an effective diversifier.
Hence, we recommend subscribing to the current series.
Better prospects
Sometimes, compared to the current series, older series that are available in the secondary market can give you better value. However, given the current prices, especially post the ₹50 discount, no existing series appears better than the new series that is open now. For example, the best YTM (yield-to-maturity) available in the market is about 2.3 per cent (SBGs issued in March 2023), which is lower than 2.5 per cent of the current series. So, investors can opt for 2023-24 Series I SGBs.
Also read: Govt mop-up through gold bond halves in FY’23
Pros
SGBs are backed by the government and so safety is not an issue. Since they can be held in digital form, storage is never a problem and these bonds will fetch you an interest of 2.5 per cent on issue price (paid semi-annually).
Other advantages include exemption from capital gains if you hold till maturity or opt for premature redemption when RBI calls for it and these bonds are accepted as collateral for loans by the banks. You can be sure of allotment if you meet the eligibility criteria.
Cons
The benefit of capital gains exemption kicks in only after the lock-in period of five years. Also, you are likely to face poor liquidity, potentially leading to improper pricing, when you opt to sell after the lock-in. Since this can impact your overall return, SGBs are not suitable for short-term investment.
Nevertheless, as a long-term investment vehicle, the advantages of SGBs significantly outweigh the disadvantages.
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