Everything You Need to Know About Sovereign Gold Bonds (SGBs)

Sovereign Gold Bonds

If I say, you can buy Gold without physically buying it. What would you think of me? However, it is true. Sovereign Gold Bonds (SGBs) are a type of investment scheme offered by the Government of India, to promote investment in Gold without having to physically buy it. SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India.

Investing in SGBs is similar to investing in other government securities such as treasury bills and bonds. SGBs are available for purchase during specific periods, which are announced by the RBI from time to time.

Investing in SGBs can provide some advantages over physical gold investments.

  • The value of gold held by investors in SGBs is guaranteed by the Government of India
  • Investors do not have to worry about the storage or security of their gold, as SGBs are held in electronic form in investors’ Demat accounts.

The SGBs have an 8-year lock-in period. The investors will receive a Certificate of Holding, and the bonds will be eligible for demat conversion. In the fifth year, there is an exit option that can be used on interest payment days.

To invest in SGBs, investors can follow these steps:

Check the availability of SGBs

The RBI announces the availability of SGBs periodically. Investors should keep an eye out for such announcements.

Open a Demat account

Investors must have a Demat account to hold SGBs in electronic form. If you don’t have a Demat account, you can open one with a registered Depository Participant.

Purchase SGBs

Once the availability of SGBs is announced, investors can purchase them through their registered bank or through the Stock Holding Corporation of India (SHCIL). Investors must provide the bank or SHCIL with their Demat account details and other relevant information.

Pay for SGBs

The price of SGBs is based on the prevailing market price of gold. Investors can pay for SGBs through their bank account, internet banking or using other payment modes.

Hold SGBs until maturity

SGBs have a maturity period of eight years, after which investors will receive the value of the bond as per the prevailing market price of gold. However, investors can also sell their SGBs on the secondary market before maturity.

SGBs were first issued by the Government of India in November 2015, so the data available covers the period from then until now. It’s important to note that the returns on investment in SGBs are linked to the prevailing market price of gold, and as such, they are subject to fluctuations. Additionally, the returns on SGBs also depend on the purchase price and the holding period.

 

Financial Year Annualized Return
2016-2017 19.83%
2017-2018 3.09%
2018-2019 -3.35%
2019-2020 21.91%
2020-2021 27.81%
2021-2022 1.82%

 

It’s important to note that the annualized returns for each financial year are calculated based on the price of gold on the issue date and the redemption price on the maturity date. The interest earned during the holding period is also factored in to calculate the annualized returns. These returns are subject to change based on the prevailing market price of gold at the time of sale.

Based on the data available, if you had invested in SGBs in April 2016 and redeemed in April 2023, your returns in percentage would be approximately 89.82%.

Let’s see the Calculations:

The issue price for SGBs in April 2016 was Rs. 2,916 per gram.

The redemption price for SGBs in April 2023 was Rs. 4,976 per gram.

The holding period for the investment would be 7 years (April 2016 – April 2023).

The interest earned on SGBs during the holding period would be 2.50% per annum.

Using the formula for calculating returns on investment, we get:

Redemption value = Issue price * (1 + Total interest) * (Redemption price / Issue price)

= 2,916 * (1 + (2.50% * 7)) * (4,976 / 2,916)

= Rs. 5,364.81 per gram

 

Total return = (Redemption value – Issue price) / Issue price * 100

= (5,364.81 – 2,916) / 2,916 * 100

= 84.31%

 

The above calculation gives us the absolute return on investment. To calculate the annualized return, we use the following formula:

 

Annualized return = ((1 + Total return) ^ (1 / Holding period in years)) – 1

= ((1 + 0.8431) ^ (1 / 7)) – 1

= 0.1071 or 10.71%

 

Therefore, the approximate returns on investment in SGBs from April 2016 to April 2023 would be 89.82% (absolute return) and 10.71% (annualized return).

 

Now, it’s time to discuss the advantages of SGBs:

  1. Unlike any other investment avenue in Gold, SGB offers assured annual interest rate of 2.50% on gold bonds.
  2. There is no stress to handle physical gold & no storage cost is involved.
  3. Being held at demat form, there are no concern w.r.t purity of gold & making charges.
  4. No GST involved at the time of purchase unlike physical gold.
  5. The capital gain tax is exempted if investor holds the investment till maturity i.e. 8 years.
  6. SGBs are tradable on stock exchange.

 

In conclusion, investing in sovereign gold bonds is a convenient and secure way for Indian investors to invest in gold. By following the steps mentioned above, investors can easily purchase and hold SGBs in electronic form without having to worry about the storage or security of physical gold.

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