A reader asked if I could share my views on Sovereign Gold Bonds. I have already expressed my views on SGBs more than 3 years ago. Since it has been a while I thought I should revisit and see if my views have changed. Although nothing has changed from my perspective, it may still be a good investment for some. So I decided to do another post on SGB with the latest information.
First lets understand SGBs quickly before deciding whether it is a good investment for you or not. Sovereign gold bonds are issued by RBI and thus are one of the safest investments. If you like to invest in gold, but don’t want to hold physical gold, this is a good option for you. You have to buy a minimum of 1 gram up to a maximum of 4 kgs per fiscal year (April - March). That means, going by the current issue price of SGB you can invest from Rs. 6,000 all the way till Rs. 2.3 crores per fiscal year. All the capital gains are tax free. In addition you get an annual interest of 2.5% paid semi-annually which is taxable at applicable rate. You can get more details on RBI’s FAQ page.
Those are all the positives of SGB. Now for some negatives. Remember that these may not seem like negatives to everyone. For some, they may mean nothing or even positive. The first issue is that SGBs, like equity market, can go up or down in value over time. So there is no predictability of its value in the future unlike FDs or some debt mutual funds. Generally this may not be a problem, because after all even equity mutual funds go up and down in value and we are not too concerned about it. The problem is that SGBs mature after 8 years and the value at the time is deposited into your account. Now, if the value of SGB is on the low side at the time of maturity, you will be selling for a loss or low profit. In the case of equity MFs, you can choose not to sell when the market is down and wait for it to recover. That flexibility is not available with SGBs.
The other problem as I see it with SGBs is that they are illiquid. This is sort of like the inverse of the problem I mentioned above. Your bond matures after 8 years. What if you need money in 1 year after you invest? With debt or equity mutual funds, you can sell any time you wish. Not so with SGBs. Of course, you are allowed to sell them after 5 years instead of waiting till maturity, but this is just a minor help. Alternatively you can trade in secondary markets. These aren’t simple activities. And you know what I like – simple and flexible investments. So for me SGBs are neither.
One more reason I don’t like SGBs is because they are an unproductive asset class. If you buy a land, you can live in it or grow fruits and vegetables. There is some productive outcome. If you invest in companies, they make tools or improve our lives in some way or the other. But buying gold is like buying some precious thing in the hope that you will find someone in the future who will pay more for it although it has done nothing productive all the while. That aspect bothers me and I can’t get myself to invest in it. I’d rather invest in people or industries. Then again, that’s me and my usual rants which may not apply to others.
Finally, you cannot buy SGB when you like because RBI releases the series at certain times which is not predictable. In 2023-24 so far, RBI released only 2 tranches (Series 1 in June 2023 and Series 2 in September 2023). While it released 14 series in 2017-2018. So it is very unpredictable and you cannot buy/invest when you feel like. Actually, that statement is not entirely true. You could buy in secondary market when you like but the liquidity will be poor.
With that understanding, lets see how SGBs performed in the past. I did not have this data point back when I wrote my earlier post in 2020. Now we have some history and see if the returns are worth the risk we take. Below is a table with capital appreciation of some of the SGBs that were issues. You can get the price information for every SBG issued from RBI’s website.
|Date||Price||5 year returns||6 year returns||7 year returns||8 year returns|
As you will notice, the returns are pretty good and that too without having to pay any tax on it. Of courses tax laws can change anytime, so don’t bank on it. Moreover, you get an additional 2.5% interest too. So add another 2.5% to the above returns and now SGBs look even more attractive. Compare SGB returns with the 2.5% interest added to it with returns from some nifty indices over 5 years (see below table).
|Date||SGB returns||Nifty 50||Nifty 500||Midcap 150||Smallcap 250|
You can immediately see how SGB has easily beaten Nifty 50 and Nifty 500 3 times out of 4. While midcap and smallcaps were able to beat SGB 50% of the time. But remember that this is such a short history that we cannot make any conclusions. So it seems like for some investors SGB may not be a bad idea (keep the drawbacks I mentioned above in mind). You can make the best out of SGB if you can forsee fall in stock markets because that is when gold outshines capital markets like in 2020 when COVID-19 affected stock market and people made a beeline to gold causing the price to increase. But if you look at the only available data point of 8 year return, then some equity indices beat SGB (see below table). Make what you want of it.
|Investment||8 year return|
As for me, I still stick with my stance from 2020. To me SGB feels like it has the illiquidity of FDs/real estate, with volatility of equity for no major benefit in terms of returns while being an unproductive asset class. But that’s me. You can choose to look at it differently. I still won’t invest in it unless I can figure out when to enter and exit it (which I don’t know yet). You can see SGB as a hedge against gold prices if you want to buy gold after 8 years for some occasion like marriage or something.