Does investing in SGBs that are trading on exchanges make sense? | Simply Save

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Sovereign Gold Bonds (SGBs) are among the best gold investment routes for individuals willing to remain invested for the entire eight-year maturity period. While the interest received is subject to taxation for investors, the capital appreciation upon maturity enjoys tax exemption. Moreover, the sovereign guarantee and the lack of credit risk increase the attractiveness of SGBs.

Outstanding units of SGBs worth Rs 96,120 crore issued by the government of India might take a hit, after the Union Budget 2024 cut customs duties on gold and silver to 6 percent, down from 15 percent earlier, bringing gold prices down.

Till date 67 tranches of SGBs have been issued since the first tranche was issued on November 30, 2015 by the Reserve Bank of India (RBI) on behalf of the Government of India. Data compiled by Moneycontrol pegs the total number of units (equated in tonnes) at 147 tonnes, valuing the issued units at Rs 72,274 crore. In FY 2023-24, a total amount of Rs 27,031 crore was invested in SGBs.

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These gold bonds are not backed by physical gold. The objective of SGBs is to discourage people investing in physical gold and direct them to buy paper gold. Even since their launch in 2015, the instruments have seen an overwhelming response.

However, Since February this year, there hasn't been any new issue of the Sovereign Gold Bonds (SGB) scheme. The government might reduce or even discontinue the SGB scheme, citing concerns that it's costly. Old issues trade on exchanges such as the BSE and NSE, even though amid thin volumes. Does investing in SGBs that are trading on exchanges make sense and what role can SGBs play in asset allocation in a portfolio? Moneycontrol spoke to Harshad Chetanwala, co-founder, MyWealthGrowth.com for answers.

Here's a highlight of what Chetanwala said:

- Consider SGBs as a long-term investment aligned with gold prices rather than for short-term gains due to price volatility.

- View gold as an asset allocation instrument rather than for speculation to avoid potential disappointment from price fluctuations.

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- Continue investing in SGBs if they maintain benefits like being government-backed and providing interest and tax advantages. Focus on the goal of investing in gold rather than the instrument.

- The impact of Budget 2024 proposals on sovereign gold bonds is a natural reduction in price due to lower import duty, affecting both gold ETFs and sovereign gold bonds.

- SGBs have fared well in line with gold prices, with some variations in prices due to volume issues.

- Gold bond volumes on exchanges could be lower due to maturity and investor horizon.

- Despite lower volumes, SGBs still offer investment benefits.

The government may be slowing down the issuance of sovereign gold bonds due to India's high appetite for gold investments.