Sovereign Gold Bonds 2023-24 Series II: Should you subscribe?

Sovereign Gold Bonds’ (SGBs) 2023-24 Series II is now open for subscription. Investors can subscribe for the same during September 11-15.

RBI has fixed the issue price at ₹5,923 per gram of gold. There will be a discount of ₹50 per gram when the application is made online; thus, the price will be ₹5,873 per gram. Investors will get 2.5 per cent interest on the issue price, paid semi-annually. While one can buy from as low as one gram, the upper limit is 4 kgs per fiscal for an individual.

SGBs can be applied through banks, designated post offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorised stock exchanges.

• Read: Gold demand down 7% in June quarter as domestic prices soar

Should you subscribe to the latest series, especially considering that the gold price has fallen late? Below is our take.

Gold trend

The price of the yellow metal has declined since May this year. In dollar terms, the price dropped from about $2,080 an ounce to the current level of $1,928. However, year-to-date (YTD), gold is up nearly 6 per cent. In the domestic market, gold futures on the MCX, now at around ₹59,000 (per 10 gram), has gained a little over 7 per cent.

The price drop is temporary, as over the long-term, the precious metal has generally given good returns, especially in terms of rupee. Investors in India have historically benefitted from gold prices going up in USD terms as well as from rupee depreciation versus USD, which adds to returns. For instance, the 2016-17 Series IV comes up for redemption on September 16 for ₹5,929 per unit; it was issued at ₹2,893. Thus, it has produced a 14 per cent return since it was issued, close to the 15 per cent return of the Nifty Total Return index.

Therefore, iinvestors should have exposure to gold, with SGBs being a preferred avenue, particularly for those looking to hold their investments for over five years. Gold, in general, is recommended to comprise about 10% of your overall portfolio, irrespective of market sentiment, as it offers diversification benefits by being uncorrelated with most other assets. Consequently, we recommend subscribing to the current series.

Reasonable price

At times, older series available in the secondary market may offer better value than the current series. However, given the current prices, especially after the ₹50 discount, none of the existing series provides a higher overall return than the new, currently open series. For example, the best Yield-to-Maturity (YTM) available in the market is approximately 2.4% (for SGBs issued in June 2023, i.e., the last series), slightly less than the 2.5% offered by the current series. Moreover, the new issue carries no liquidity risk. Hence, investors may opt for the 2023-24 Series II SGBs.

Pros

SGBs are government-backed, ensuring safety. Being held in digital form eliminates storage concerns. These bonds offer a 2.5% interest payment on the issue price (paid semi-annually), enhancing overall returns. Other advantages include exemption from capital gains tax if held till maturity or redeemed prematurely when RBI calls for it. Additionally, banks accept these bonds as collateral for loans, and eligibility criteria ensure allotment.

Cons

There is a 5-year lock-in period. Additionally, selling after the lock-in period may pose liquidity challenges, potentially affecting overall returns. Hence, SGBs are not suitable for short-term investments. Nevertheless, as a long-term investment vehicle, the advantages of SGBs significantly outweigh the disadvantages.

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