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Published: August 7, 2023
Updated: August 7, 2023

Sovereign Gold Bonds Outshine Stock Market Returns Over Eight Years

Sovereign Gold Bonds (SGBs) have proven to be a highly successful investment avenue, offering impressive returns comparable to the stock markets. As the first tranche of bonds issued eight years ago approaches maturity on 30 November this year, SGB holders are set to earn handsome returns, making it an attractive investment option.

Impressive Returns on Gold Bonds:

Investors who purchased SGBs at an issue price of ₹2,684 per gram on 30 November 2015 are now reaping the rewards, as the closing price of 24-carat gold reached ₹5,929 per gm on Friday. This translates to an impressive Compounded Annual Growth Rate (CAGR) of 12%, including the interest component on the bond's nominal value, adjusted for tax at the highest income slab of 30%.

Competing with the Stock Market:

While the Nifty Total Returns Index generated a 13.82% CAGR during the same period, reaching from 10,146 to 28,582, SGBs proved to be a close rival, offering attractive returns.

Unique Investment Proposition:

One of the key advantages of SGBs is the additional interest rate component on the issue price, making it a unique and rewarding investment proposition. Amol Joshi, the founder of PlanRupee Investment Services, highlights that gold offers a dual advantage as a hedge against inflation and a safe haven asset, making it an essential part of a diversified portfolio along with international equities.

Success of Gold Bonds:

Gold bonds have witnessed significant success over the past eight years, with SGBs backed by a cumulative 109 tonnes of gold being subscribed. The outstanding value of these bonds stands at ₹64,650.5 crore, surpassing net assets held by gold Exchange-Traded Funds (ETFs) at ₹22,339 crore as of June-end.

Tax Advantages and Eligibility:

One of the significant benefits of holding SGBs until maturity is tax-free capital gains. The interest, however, is taxed at the applicable tax bracket of the investor. Eligible investors include individuals, HUFs, trusts, universities, and charitable institutions, with a minimum investment requirement of one gram and a maximum limit of 4 kg per individual fiscal year.

Risks and Redemption:

While SGBs provide tax advantages and fixed interest payments payable semi-annually, they are not immune to risks, such as capital loss in case the market price of gold declines. However, an early exit option is available after the fifth year from the date of issue on coupon payment dates. It's noteworthy that only a small fraction (1.3 tonnes) of the total 110.4 tonnes subscribed over the past eight years have been prematurely redeemed.

The remarkable performance of Sovereign Gold Bonds over the past eight years has made them an attractive and rewarding investment option, competing favourably with stock market returns. With tax advantages and the unique combination of interest and price appreciation, SGBs continue to garner investor interest. As investors diversify their portfolios, SGBs have proven to be a reliable and lucrative asset, providing stability and growth potential in the ever-changing financial landscape.