Indian investors generally invest in Public Provident Funds (PPF) or fixed deposits (FDs), both known for providing a stable and guaranteed return. However, diversifying your portfolio is a smart strategy to optimise returns and mitigate risks. One such promising avenue for investment is the Sovereign Gold Bonds (SGBs) offered by the Reserve Bank of India (RBI).
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Investing in SGBs provides a hedge against inflation, unlike PPFs or FDs, which have been hit by inflation over the years. The reason is that the prices of gold, which form the base of SGBs, are generally inversely proportional to the economic conditions. When the economy weakens, or inflation rises, the prices of gold rise; thereby protecting the investors’ purchasing power.
Sriram BKR, Senior Investment Strategist, Geojit Financial Services, says, “Though gold could not be a similar alternative to fixed income options, those keeping money in FDs and PPF, looking for diversification apart from equities, gold could be a choice for such investors. Gold apparently is the next best-performing asset class in India, next to equities, going by the past 10 to 15 years of data. SGBs offer a fixed interest of 2.5% per annum on the investment amount, payable semi-annually. Additionally, SGB gives investors an opportunity to participate in the price appreciation of gold if it were to happen over a longer term.”
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SGB has an overall tenure of 8 years, and premature withdrawal is allowed after 5 years. Sriram says, “Over a nearly 34-year period, data suggests that if one remained invested in gold, the outcomes were favourable. For 5-year duration, the average returns stood at 9.1%, with positive returns occurring 83% of the time and returns exceeding 7% in 55.5% of cases. Similarly, for an 8-year period, the average returns remained at 9.1%, with positive returns observed 96% of the time, and returns surpassing 7% in 57% of instances. When factoring in the SGB interest, the likelihood of positive returns and returns exceeding 7% would likely improve for both 5 and 8-year spans. Notably, for an 8-year investment horizon, positive returns were observed 100% of the time.”
“Apart from this, capital gains arising on maturity are exempted from long-term capital gain tax, and SGB is eligible for indexation benefits on the transfer of bonds. This is a clear and exclusive advantage that comes with SGB,” he added further.
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Sachin Kothari, Director at Augmont, says, “Gold has been giving around a 12% CAGR return for the last 20–25 years. SGB was introduced in 2015, and two tranches of SGB, which have matured recently, have given returns of more than 15% per annum. Also, SGB has become increasingly popular in the past few months as it is risk-free and tax-free, comes with an additional interest rate of 2.5%, without any storage cost, and makes costs with better returns than PPF and bank FD.”
Echoing similar views, Ajinkya Kulkarni, Co-Founder and CEO of Wint Wealth said, “For investors in the highest tax bracket, the first tranche of SGB has delivered 12.28% CAGR over 8 years. This includes both, interest pay-out and capital gains. This is after the assumption that the interest was also reinvested. The returns show that SGBs are a good choice to protect the capital against market volatility. It complements fixed-income instruments such as PPF and bank FDs, which provide slightly lower but more secure returns. After factoring in the financial goals and risk profile, retail investors can allocate about 10% of their portfolio to the yellow metal through SGBs.”
