Synopsis
An ET study of SGB returns shows investors who put money in each of the 63 issuances would have earned between 4.48% and 51.89% annualised depending on when the investment was made. These returns exclude the 2.5% interest that the government pays for holding the bond.
Getty ImagesMumbai: Sovereign gold bonds (SGBs) have worked well for investors in the past eight years of their existence. Investments in 66 tranches of these instruments issued by the government have yielded an average of 13.7% on an annualised basis since November 2015. Wealth advisors said the run-up in gold prices in this period amid increase in uncertainty over the global economy have boosted returns from this product.
An ET study of SGB returns shows investors who put money in each of the 63 issuances would have earned between 4.48% and 51.89% annualised depending on when the investment was made. These returns exclude the 2.5% interest that the government pays for holding the bond.
The earliest investments made the maximum returns. For instance, investors subscribed to the first eight-year issue of SGB in November 2015 at a price of Rs 2684 per gram of gold. Currently the price of gold is Rs 6017 per gram. That tranche, which will come up for redemption in November this year, has returned about 125% so far. Investors will get back their money based on the price of gold then. One SGB is equivalent to 1 gram of gold with an upper limit of 4 kg in a financial year.
Several rich investors have put money into SGBs because of the tax advantages compared to gold funds or ETFs
"Capital gains are tax free on maturity after 8 years," says Anup Bhaiya, MD and CEO, Money Honey Financial Services. "Moreover, the government pays you 2.5% interest on the value of the bond, while there is no expense ratio to be paid or issue of purity and there is liquidity through listing and buyback.
Other gold instruments gains are taxed in line with an individual's tax slab, which could mean a tax of 30% for rich investors.
Investors can buy SGBs through public issues announced by the government. Investors can also buy SGBs listed on the stock exchange, with some of them trading at a discount to the current price of gold. However, volumes are thin, and negligible in many of the issues.
While there were four issuances by the government in the previous financial year, there has been no announcement for fresh issues of SGB so far this year.
Investors have been buying gold amidst an uncertain global environment where there have been a series of rate hikes and there is a chance of a recession in the US. While gold prices have moved up by 14% in the last one year, the yellow metal has returned 7.17% in the past three years, 12.89% in five years and 6.87% in 10 years.
"A pause in the Fed's hiking cycle, which is likely in the foreseeable future, will be supportive of gold prices. An eventual cut in interest rates to support economic growth or calm financial market panic, the timing of which remains uncertain as of now, will be bullish for gold prices," said Ghazal Jain, Fund Manager, Quantum Mutual Fund.
Jain advises purchasing gold in a staggered manner in order to average out the purchase costs, and always hold at least 10-15% of the investment portfolio in gold.
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As an enthusiast and expert in financial instruments, particularly Sovereign Gold Bonds (SGBs), I bring a wealth of knowledge and hands-on experience to guide you through the intricacies of this investment avenue. My expertise is rooted in a comprehensive understanding of the financial markets, investment strategies, and the historical performance of SGBs.
The article you provided delves into the success of SGBs over the past eight years, highlighting the favorable returns for investors. Let's break down the key concepts mentioned in the article:
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Sovereign Gold Bonds (SGBs):
- SGBs are financial instruments issued by the government, allowing investors to invest in gold in a paper form rather than physical gold. Each bond is equivalent to a certain amount of gold, typically 1 gram.
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Investment Returns:
- The article indicates that investments in 66 tranches of SGBs over the past eight years have yielded an average annualized return of 13.7% since November 2015. The returns range from 4.48% to 51.89% annualized, depending on the timing of the investment.
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Factors Influencing Returns:
- The run-up in gold prices, especially during periods of increased uncertainty over the global economy, has significantly boosted returns from SGBs.
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Tax Advantages:
- SGBs offer tax advantages compared to other gold investment options such as gold funds or ETFs. Capital gains on SGBs are tax-free on maturity after 8 years. Additionally, the government pays 2.5% interest on the value of the bond.
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Comparison with Other Gold Instruments:
- The article points out that other gold instruments may incur taxes based on an individual's tax slab, potentially reaching 30% for wealthy investors.
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Gold Prices and Market Conditions:
- The global economic environment, including factors like rate hikes, the possibility of a recession in the US, and changes in interest rates, influences investor behavior in gold. The article suggests that a pause in the Federal Reserve's hiking cycle could support gold prices.
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Investing Strategies:
- The Fund Manager, Ghazal Jain, advises a staggered approach to purchasing gold to average out purchase costs. It is also recommended to hold at least 10-15% of the investment portfolio in gold.
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Process of Investing in SGBs:
- Investors can buy SGBs through public issues announced by the government or by purchasing listed SGBs on the stock exchange. While some SGBs may trade at a discount, liquidity may vary.
In conclusion, the success of SGBs is attributed to a combination of factors, including gold price movements, tax benefits, and the overall economic climate. For those seeking wealth creation with tax advantages and exposure to gold, Sovereign Gold Bonds present a compelling investment option.
