Sovereign Gold Bond 2016-I matures; gives 13.6% return and outperforms gold funds

The SGB 2016-I tranche was issued at a price of Rs 2,600 per gram on February 8, 2016.

The sovereign gold bond (SGB) 2016-I, which came up for maturity on February 8, has delivered an extended internal rate of return (XIRR) of 13.6 percent or an absolute return of 163 percent to investors.

According to a recent Reserve Bank of India (RBI) notification, the price for the final redemption was Rs 6,271 per unit of SGB, which is based on the simple average closing price of gold for the week of January 29-February 2, 2024.

The SGB 2016-I tranche was issued at a price of Rs 2,600 per gram on February 8, 2016. For the initial issues, the interest on the gold bonds was at a fixed rate of 2.75 percent per annum on the amount of initial investment. This fixed coupon was revised to 2.5 percent in later issues of SGBs.

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When it comes to mutual funds, the biggest gold exchange-traded fund (ETF), Nippon India ETF Gold BeES (assets under management of Rs 8,711 crore), has a delivered compounded annual growth rate (CAGR) of 9.31 percent from February 8, 2016, to February 8, 2024. The returns given by the Nifty 50 Total Return Index (TRI) during this period stand at 15.9 percent.

The initial issues of SGBs issued by the government have started to mature in recent times.

The first issue of SGBs, Sovereign Gold Bonds 2015-Series-I, which matured on November 30, 2023, also managed to outperform other forms of investment avenues based on the precious metal.

Data compiled by Moneycontrol showed that SGB-2015-Series-I delivered 12.9 percent XIRR since its launch on November 30, 2015.

The RBI has announced that a new issue of SGB, Sovereign Gold Bond Scheme 2023-24 Series IV, will be open for subscription from February 12 – February 16, 2024. The issue price of the tranche hasn’t been announced yet.

The price of the SGB is fixed based on a simple average of closing price of gold of 999 purity, published by the India Bullion and Jewellers Association (IBJA) for the last three working days of the week preceding the subscription period.

The issue price of the SGBs will be less by Rs 50 per gram for the investors who subscribe online and pay through the digital mode.

Financial experts are unanimous in suggesting that sovereign gold bonds are the best way to invest in gold if an individual is ready to hold the investment till maturity, which is eight years.

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Also, since SGBs are backed by sovereign guarantees, there is no credit risk. The interest payout makes it even more attractive since gold as an asset class does not offer income.

Further, SGB returns are exempt from taxes when held until maturity, provide a significant advantage over other gold investments, such as gold funds or gold ETFs.

Additionally, SGBs offer a fixed return of approximately 2.50 percent per annum. Unlike gold funds and ETFs, SGBs do not entail expense ratios, further distinguishing them in terms of cost-effectiveness.

When deciding between Gold ETFs and Sovereign Gold Bonds, investors should assess their investment objectives, risk tolerance, and preferences. While both options offer exposure to the gold price, the decision hinges on factors such as liquidity requirements, taxation implications, and the inclination towards earning interest income.