Sovereign Gold Bond Scheme 2023-24 Series IV opens; should you invest?

SGBs are government securities denominated in grams of gold, and they are substitutes for holding physical gold.

The SGB issue price is determined by taking the simple average of the closing prices of 999 purity gold, as reported by the India Bullion and Jewellers Association (IBJA) during the three working days of the week prior to the subscription period.

“The nominal value of the bond based on the simple average of closing price (published by the IBJA) for gold of 999 purity of the last three working days of the week preceding the subscription period, i.e. February 7-9, works out to be Rs 6,263,” RBI said in a notification.

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The government offers a discount of Rs 50 per gram less than the nominal value to those investors applying online and making the payment through a digital mode.

The bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the bond is one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government per financial year.

The bonds also give a fixed interest rate at 2.50 per cent per annum on the amount of initial investment. Interest is credited semi-annually to the bank account of the investor.

What works?

Over the years, gold has given decent returns to investors. As per the Domestic Price of Gold Index available on Value Research, gold has given 8.92 percent, 9.55 percent and 13.54 percent returns on a one-year, three-year and five-year basis, respectively.

Even the sovereign gold bond 2016-I, which matured on February 8, 2024, delivered an extended internal rate of return (XIRR) of 13.6 percent or an absolute return of 163 percent to investors.

SGBs are one the best investment routes in gold 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 increases the attractiveness of SGBs.

Additionally, SGBs offer liquidity through secondary market trading, allowing investors to exit before maturity, if necessary. In that case, however, gains arising from the investments are subject to taxation.

What doesn’t work?

In 2023, gold returns surpassed expectations in a challenging high-interest-rate environment and outperformed commodities, bonds, and the majority of global stock markets. At the close of 2023, gold reached a record-breaking peak, surging to $2,135.39 per ounce.

Experts feel that gold looks vulnerable to a modest retreat in the near-term, but the outlook remains bullish in the medium to long term.

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SGBs have a long maturity period of eight years. If investors' outlook is for the short term, SGB may not be ideal. However, investors can redeem the bonds after five years from the investment date. Additionally, SGBs are not as liquid as gold exchange-traded funds or gold mutual funds.

Should you invest?

SGB continues to be one of the best ways to invest in gold. Further, it is a must to have an allocation in gold from a diversification perspective.

Harshad Chetanwala, Co-founder, MyWealthGrowth.com believes that based on the profile and comfort of an investor, one can consider around 5-10 percent allocation in gold.

“If such allocation is still not in place then one can look at subscribing to SGBs. This investment can be held till maturity and reinvested when the next tranche comes post maturity as one would like to hold gold in the portfolio for a longer period. This will also give the benefit of annual interest and there will be no capital gains applicable as it is held up to maturity,” said Chetanwala.

According to Rushabh Desai, Founder, Rupee With Rushabh Investment Services, SGBs will always be a good bet despite the price levels of gold.

“The key factors are how much are you investing and the quantity you are looking to invest in gold. A small to moderate allocation is very comfortable,” he said.

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However, for those investors who want to invest in gold, which is beyond their allocation, Desai has a word of caution.

“If someone wants to invest a sizeable chunk, then looking at the gold prices is important. At this point, investing a big amount is not advisable because gold prices are at an elevated level. However, a small or moderate amount is never going to hurt, because of the tax-free nature of the sovereign gold bonds and the interest it provides over and above that,” Desai said.