Sparkling returns for gold bond investors this Diwali

Against an issue price of  ₹2,684 per gram, the current rate of 24-carat gold is above  ₹6,100, implying an annualized return of 10.92%.
Against an issue price of 2,684 per gram, the current rate of 24-carat gold is above 6,100, implying an annualized return of 10.92%.

Summary

Investors in the first tranche of sovereign gold bonds (SGBs) issued by the Reserve Bank of India (RBI) in 2015 could enjoy a potential 300-crore ($40 million) Diwali bonanza, with returns comparable to stock markets.

Mumbai: A potential 300-crore Diwali bonanza awaits investors in the first tranche of sovereign gold bonds (SGBs) that took off modestly eight years ago but have since enamoured investors with returns rivalling those of stock markets.

On 30 November 2015, the Reserve Bank of India (RBI) issued the first tranche of 914 kg of gold bonds on behalf of the government. Of these, investors have so far redeemed 54 kg, leaving around 860 kg outstanding. Now, the bonds are up for redemption, with returns on a par with stocks, if the interest component on these bonds is added to their capital gains.

Against an issue price of 2,684 per gram, the current rate of 24-carat gold is above 6,100, implying an annualized return of 10.92%. However, to sweeten the scheme, the government has added a simple interest of 2.75% on the issue price. Together, the annualized return works out to 12.99%, according to Amol Joshi, founder of PlanRupee Investment Services.

Graphic: Mint
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Graphic: Mint

During the same period, the Nifty Total Return Index, which captures both capital appreciation and dividends, was up 13%.

The redemption price of these bonds is based on the simple average closing price of 24-carat gold across three previous business days from the date of redemption, as published by trade body India Bullion and Jewellers Association.

The capital gain, which is tax-free at redemption, and the interest component, which is taxable, together make it a winner for investors, Joshi said. “SGBs are a gold investment product of choice for all gold investments except for physical gold that you will be using for actual consumption in the form of jewellery."

So far, bonds for 120.58 tonnes of gold worth 56,328 crore have been issued in tranches. Interest in the gold bonds rose in subsequent tranches, except for a lull between FY18 and FY20. The last two tranches in the current fiscal year saw significant interest, with 16% of the outstanding bonds seeing subscriptions.

Gold is seen as an attractive investment option during periods of high inflation, and bonds are a suitable way to diversify one’s portfolio.

“Gold, in paper or physical form, can comprise around 10% of an investor’s portfolio as it makes for an ideal hedge against inflation, which is a global phenomenon now," said Rupa Rege-Nitsure, group chief economist at L&T Finance. “The bonds are attractive not just from the capital appreciation perspective but also because of the interest on the issue price while holding physical gold might involve incurring costs such as insurance and storage."

Veteran investor Shankar Sharma, founder of GQuant Investech, says the interest component added to the capital appreciation potential of the bonds makes investing in it a “no-brainer."

While capital gains are nil at redemption, the interest is added to the investor’s income and taxed. India is the second-largest consumer of gold after Greater China, which includes mainland China, Hong Kong and Taiwan. In the third quarter of 2023, India consumed 155.7 tonnes of gold jewellery, up 7% from a year earlier, against Greater China’s 163.9 tonnes, down 4%.

The government launched the gold bond scheme in 2015 to wean Indians away from physical gold, which was adding to the current account deficit, as India imports almost all of the gold it consumes.

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