Is Sovereign Gold Bond The Best Gold Investment For You?

The Government of India launched the first series of Sovereign Gold Bonds (SGB) in 2015, marking the beginning of this investment option. Since then, a total of 67 issuances have been completed, with buyers subscribing to over 146.96 tons of gold¹.

During the 2023-24 period, demand soared, with subscriptions tripling from previous years².

When we look at the returns, the initial batch that matured in November 2023 provided an absolute return of 128.5%, excluding interest. Meanwhile, the latest 2016-17 Series I, closed in August 2024, offered around 122% absolute return over its full-term³.

As these bonds continue to grow in popularity, they provide an appealing alternative to holding physical gold. But what makes them so attractive, and what should potential investors keep in mind? Let us explore further.

What Are Sovereign Gold Bond Schemes? 

The instrument offers a regulated and government-backed way to invest in gold without holding the actual metal. Introduced by the apex bank RBI or the Reserve Bank of India, these bonds allow investors to gain from gold's value without the storage and security concerns that come with physical ownership.

Over the last ten years, the yellow metal’s price has appreciated. On September 11-2014, it was INR 2,429.15 per gram⁴. Around the same time in 2024, it had climbed to around INR 6,740. This shows a 177.6% increase over the decade, offering investors the opportunity to capitalise on gold's growth without physically buying or storing it.

The primary goal was to reduce the country's heavy reliance on gold imports. By offering these bonds, the government aimed to shift a portion of savings away from physical forms and into financial assets. This helps lower the current account deficit while putting idle domestic wealth to productive use.

How Do SGBs Work? 

Gold bond schemes are released periodically in tranches throughout the year. During specific subscription periods, individuals can invest in these securities. 

How To Acquire Them

Each bond represents a specific weight of gold, starting from 1 gram (Maximum 4kg). This makes it an option for a wide range of investors. Upon completing the process, investors receive a certificate confirming their ownership. If desired, they can convert this into a digital format for electronic holding.

Gold Bond Price

The value of each bond is directly linked to the prevailing market rate of gold. The RBI determines this price by averaging the last three days' closing prices of gold with 999 purity, as reported by the India Bullion and Jewellers Association (IBJA). Generally, for those opting for an online purchase, there's an incentive: INR 50 off per gram, which makes digital transactions more appealing.

Annual Returns

Unlike physical gold, SGBs come with a fixed annual return of 2.5%. This interest is disbursed every six months, adding an extra layer of profitability. The interest payments are based on the initial gold bond investment, and they get credited directly to your bank account. Alongside the potential appreciation of gold’s price, this fixed return enhances your overall earnings.

Redemption And Exit Options

These bonds come with an eight-year term, but you do not have to wait for the full duration. Investors are allowed to exit after five years, though only on specific dates tied to the semi-annual interest payouts. When redeeming, the payout is calculated based on the current market rate, ensuring the bond’s value reflects the actual price of gold.

Liquidity And Trading

For those needing flexibility, these bonds can be traded on recognised stock exchanges like NSE and BSE. Investors can sell their holdings in the secondary market if they wish to exit before the bond matures. This offers liquidity without being locked into the full eight-year term.

Buying Sovereign Gold Bond

SGBs can be obtained through a range of channels, including authorised banks, designated post offices, and brokers. You can also buy gold bonds online, providing a convenient option for investors. The digital route is encouraged with the additional INR 50 discount per gram.

Taxation

Capital gains at maturity are fully exempt from taxation. However, the interest you earn is added to your income and taxed accordingly. If redeemed after five years, there are no taxes on gains. But selling on the exchange before the bond term ends could lead to applicable taxes based on the holding duration.

Advantages Of Buying Sovereign Gold Bonds 

1. No Storage Or Security Concerns

Owning gold comes with the worry of where to keep it securely. These bonds remove that burden. Since they exist in electronic form, there is no need for physical safekeeping or the risk of loss. 

2. Backed By The Government

SGBs carry the full backing of the Government of India, ensuring complete safety of your bond investment. This sovereign guarantee offers peace of mind, especially for risk-averse investors.

3. Steady Returns

Unlike physical gold, which does not generate income, these bonds offer a guaranteed 2.5% annual return, distributed every six months acting as a fixed income investment. 

4. No Additional Charges

Buying jewellery or gold bars often involves extra costs like making charges or wastage. With SGBs, such expenses do not exist. 

5. Tradable For Liquidity

If you need access to your funds before the early redemption window, these bonds can be traded on the stock exchanges. This feature provides liquidity, enabling investors to sell their holdings whenever needed, without waiting for maturity.

Risks Involved With Buying SGBs 

1. Price Fluctuations

The value of these bonds is directly linked to the shifting price of gold. If the market price of the metal drops, so does the value of your investment. For example, following the customs duty cut on July 23, 2024, which reduced the duty from 15% to 6%, the price of gold saw a sharp decline. Some bond tranches, like the 2016-17 Series IV, dropped by 8% between July 22 and August 9, 2024⁵. This kind of volatility can negatively impact returns, particularly for those holding short-term positions.

2. Limited Accessibility

Unlike physical assets, these bonds come with restrictions on early withdrawal. Though you can exit after five years, this is limited to specific interest payout dates. If liquidity is needed before then, you will need to rely on the secondary exchange, where demand can be low. This makes it difficult to sell quickly or at a favourable rate.

3. Long-Term Investment Commitment

SGBs are designed for long-term holding, with a total duration of eight years. While early exit is possible after five years, this may not suit investors seeking more flexibility.

4. Limited Purchase Opportunities

These bonds are not available year-round. The government issues them in specific tranches, meaning you need to wait for the next subscription window if you miss one. Alternatively, buying them on the secondary market could involve paying more than the initial price, reducing potential gains.

According to a report from CNBC -TV18, the government is likely to discontinue the SGB scheme⁶. The report says that the government is finding this scheme expensive and complex. Also, the government owes a large amount to the investors which is a reason behind this consideration of discontinuing the SGB scheme. However, as of October 2024, there is no official announcement from the government to discontinue the scheme. But the government has not announced the 2024-2025 series so far. Not only this, during the last two years only 4 tranches have been released. Thus, it is clear that if not discontinued completely, the issuances will be lower than the usual. In such a scenario, it is important for the investors to consider the alternatives to Sovereign Gold Bonds.

What Are The Alternatives To SGBs?

After reviewing the risks tied to the SGBs, it’s worth considering other investment paths, each offering distinct opportunities.

1. Corporate Bonds

Issued by companies, these debt instruments provide better yields than government bonds, depending on the firm’s credit rating.

2. High-Yield Fixed Deposits Or FDs

Banks and Non-Banking Financial Companies (NBFCs) offer FDs with attractive interest rates. While low-risk, these deposits typically offer more modest gains compared to other options.

3. Securitised Debt Instruments (SDIs)

Securitised Debt Instruments (SDIs) are structured products that pool loans or leases into tradable securities. They are rated by credit rating agencies and are listed in stock exchanges. You can invest in SDIs like LoanX and LeaseX on Grip and earn fixed returns of up to 14%.

4. Commercial Real Estate

Investing in commercial property through fractional ownership generates rental payments and potential asset appreciation, though finding buyers can take time.

Conclusion

SGBs offer a secure route for gold investment, though they require long-term commitment and are subject to price fluctuations. For those seeking more flexibility or quicker payouts, options like corporate bonds or high-yield FDs may align better with certain financial strategies. Ultimately, the right choice depends on your goals and risk appetite. To learn more about fixed income securities sign up to Grip Invest today and explore a range of fixed income investment opportunities.

Frequently Asked Questions On Sovereign Gold Bond

1. How to buy Sovereign Gold Bonds online?

Log in to your net banking account and choose "Sovereign Gold Bond" under the investment menu. Review the terms, then proceed. Enter the required details, including quantity and nominee information. Complete the form, and confirm your application. A discount of INR 50 per gram is available for online transactions.

2. Who is eligible to invest in a Sovereign Gold Bond Scheme? 

Residents of India, including Hindu Undivided Families (HUFs), can invest in Sovereign Gold Bonds. Guardians may purchase on behalf of minors. Charitable institutions, trusts, and universities are also permitted. Joint investments are allowed, but all parties must meet residency requirements set by the RBI.

3. Is it mandatory to purchase gold bonds online? 

No, buying SGB online is not required. They are also available through listed banks, post offices and stock exchanges. Opting for the digital route gives a discount of INR 50 per gram. You can select whichever method works best for you.

4. What are the taxation rules around Sovereign Gold Bonds? 

Interest income is added to your taxable income and is charged as per your income tax slab. Gains from redemption at the end of the bond term are tax-exempt. However, selling the bonds early triggers capital gains tax based on how long you have held them.

Reference

1. RBI, Accessed from: https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=35364
2. India Gold Policy Centre Annual Report, Accessed from: https://www.iima.ac.in/sites/default/files/2024-06/IGPC%202024%20Annual%20Report%20Print.pdf
3. The Economic Times, Accessed from: https://economictimes.indiatimes.com/wealth/invest/redemption-price-of-first-ever-sovereign-gold-bond-sgb-tranche-announced-investors-to-earn-11/articleshow/105490688.cms?from=mdr
4. World Gold Council, Accessed from: https://www.gold.org/goldhub/data/gold-demand-by-country
5. Money Control, Accessed from: https://www.moneycontrol.com/news/business/personal-finance/will-sovereign-gold-bonds-maturing-in-2024-get-hurt-by-customs-duty-cut-12794117.html
6. CNBC TV-18, Accessed from: https://www.cnbctv18.com/personal-finance/sovereign-gold-bonds-next-tranche-unlikely-19463626.htm

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