Sovereign Gold Bonds – Different Perspective

Today, 11th Sep 2023, RBI is opening a new tranche of SGBs at a price of 5873/gm, 24 carat. This is not new and have been offered in the past, also will be offered going forward.

Whenever investment in gold is discussed the standard set of arguments that are put forth are:

  1. 5 to 10% gold allocation to your portfolio as diversifier
  2. Negative correlation with equity investing. So, when equity goes down gold helps protect your downside, to an extent.
  3. Hedge against inflation
  4. Gains during times of uncertainty

I am looking at gold investment from a different point of view, only SGB and not gold as a whole like physical gold, jewelry, MF, ETF, etc. Before reading further, please take a look at the price of gold and the 8 years rolling return from 2000 onwards (Image below). I.e. I calculated the 8-year annualized compounded returns starting in 2008 with 2000 as the base, and then 2001-2009 and so on till 2023 (part-year data). The returns from Bank FDs as published by RBI as historical FD rates are listed next.

In the current year, the indexation benefit, if you stay put for 3 years in Debt MFs, has been removed. So, what are the other options for a quality fixed income portfolio? Bank FD, Company FD, Annuity, Post office schemes (with the exception of PPF and children’s schemes), Government bonds, RBI floating rate bonds, MF debt schemes, all come with the burden of taxation and post-tax and inflation, you would give negative returns (for 10L+ slabs) in most cases.

Some of you might have guessed it, yes, look at SGB as an 8-year fixed-income product. Capital gains from SGB at maturity, 8 years, are tax-free. Only in 2 of the 16 occurrences since 2000, the returns would be lesser than other taxable fixed-income products. No other form of gold gets this exemption. Given the limited supply of gold and perennial demand not only for Jewelry but as central bank reserves, the chances that you would make decent returns are very high. There is a 2.5% interest payment, credited twice a year, but taxable, which is an additional incentive. So, accumulate in tranches as part of your fixed income portfolio. I feel the case is strong from this perspective.

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