The first tranche of Sovereign Gold Bond (SGB) will mature today, offering a net return of 12.9% per annum, inclusive of the fixed interest payment of 2.75% per annum (currently lowered to 2.5 per cent).
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Since the initial SGB in 2015 was launched at Rs 2,684 per gram, early investors who held the bonds till maturity are poised to make substantial profits, with the redemption price fixed at Rs 6,132 per gram. Over this eight-year period, investors have received a net return of 12.9%, including the fixed interest payout of 2.75% each year. The inaugural release of SGBs garnered investments totalling Rs 245 crore, as per RBI data.
During the same period, the Nifty50 index returned around 12% while large-cap mutual funds and gilt funds have given the return of around 13 per cent and 7 per cent. So, should you reinvest in the next SGB? “The purpose of the Gold Bonds was to enable investors to profit from fluctuations in gold prices without having to deal with the difficulties associated with purchasing and disposing of actual gold. Several unique qualities of sovereign gold bonds are not seen in other gold investments. Retaining gold in the form of sovereign bonds rather than real gold is far more prudent. Every time you alter the shape of gold, there is a loss in profit of 15–25% when buying and selling jewelry. Moreover, expenses are associated with storing, insuring, and safeguarding actual gold. SGBs can be stored in your demat account or even as physical certificates. With SGBs, the headaches of maintaining gold and losing translation are mostly avoided,” said Abhijit Roy, CEO of GoldenPi.
Apart from the fixed interest of 2.75%, what makes SGB attractive is the tax benefit it provides. “Investors who apply online get a discount of Rs 50 per gram, providing them with a lot of flexibility.
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If you purchase SGB on the secondary market and keep it until maturity in the eighth year, you will be eligible for a 100% capital gains exemption. Alternatively, you are not required to wait five years and can sell the SGB at any time. Depending on your tax slab, Short-Term Capital Gains (STCG) will be applicable if you sell within three years. In the event that you sell after three years but before eight, you will be subject to a 20% long-term capital gains (LTCG). You will, however, be eligible for a 100% capital gains exemption if you let the bond mature in the eighth year,” said Roy.
It is also important to understand that in India, the return on gold is also due to the depreciation of the rupee as compared to USD. Apart from depreciation, the prices also increase with the levy of customs duty. Moreover, with the US Fed expected to lower the interest rate in future, experts say gold prices are expected to rise.
The final redemption amount is calculated based on the simple average closing price (published by the India Bullion and Jewellers Association Ltd) for gold of 999 purity of the week preceding the maturity date. The SGB comes with a maturity period of eight years. It also gives the investor an option to exit the scheme from the fifth year onwards on the interest payment dates. These bonds are also tradable on stock exchanges within a fortnight of the issuance on a date as notified by the RBI.
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The announcement of the redemption price marks a critical phase in the first tranche of the Sovereign Gold Bond scheme. The scheme was launched amidst a lot of anticipation and has enjoyed a relatively successful run. For investors, the redemption opens an avenue to liquidate their investment and perhaps reinvest in the subsequent tranches of the SGBs. Considering it is one of the best ways to invest in gold, you can consider investing 10-15 per cent of your portfolio in gold.
