No SGB tranches likely this year: Other good options to invest in gold

If the government does not issue new SGBs, the only option left is to buy this bond from the secondary market, i.e., from listed stock exchanges like BSE and NSE.

The Sovereign Gold Bond (SGB) programme, launched by the  government in 2015, has not seen any new issuances for the financial year 2024-25 so far, and no new issues are expected for the rest of the year. Analysts suggest that the SGB program may have reached its end.

 

SGBs are debt securities issued by the Reserve Bank of India (RBI) on behalf of the government, with each unit denoting a gram of gold. These bonds offer the flexibility of trading in the secondary market and the interest in SGBs is fixed at 2.5 per cent per annum on the amount of initial investment. Interest usually gets credited semi-annually to the bank account of the investor and the last interest is payable on maturity along with the principal. On maturity, gold bonds are redeemed in Indian rupees and the redemption price is based on a simple average of closing price of gold of 999 purity of previous three business days from the date of repayment, as published by the India Bullion and Jewellers Association.  Number of SGB tranches issued between April 1 and November 30 in previous years 

Source: Value Research.

   

 SGBS haveseen a reduction in its issuance frequency over the years. Initially, the government would issue 10 tranches of SGBs annually.This number gradually decreased to four, and then to just two tranches.   Over the years, approximately 67 SGB issues raised around Rs 72,000 crore. However, the programme came with significant costs, including the payment of about Rs 3,500 crore in interest, as per the RBI.

 

The price of 24 karat per 10 gram of gold has gone up from about Rs 62,300 to Rs 73,200 in one year.

 

The rising gold prices led to a loss of around Rs 32,000 crore for the government, as the bonds were linked to gold prices, and the value of gold appreciated significantly during the bond tenure. Furthermore, the government waived capital gains taxes for SGB investors, resulting in an additional loss of approximately Rs 3,200 crore. The total financial burden on the government, including interest payments and the losses incurred due to gold price increases and tax waivers, was around Rs 38,700 crore. 

"The total size of Sovereign Gold Bonds outstanding was approximately Rs 72,274 crore (or 146.96 tonnes of gold). This figure represents the total amount of money raised through the issuance of these bonds since their inception in November 2015. The rise in the gold prices in the last 2 years has left the government high and dry due to their commitment to redeem the Bonds with Gold prices. This has led,  to the reduction in customs duty on gold from 15% to 6% in the 2024 budget, which led to a substantial drop in gold prices, affecting the redemption value of SGBs. The government has decided not to issue further SGB post their experience of guaranteed return to the investors. We are sure they are on their way out. 

 

We believe that one of the intended consequences of managing the fiscal hole of SGB but custom duty, the increased import of gold in India has increased substantially, leading to increasing current account deficit and pressure on Rupee. Hence SGB has been a very unsavoury experience of the government," said  Manish Bhandari, CEO and Portfolio Manager at Vallum Capital Advisors.

 

”Sovereign Gold Bonds (SGBs) were introduced in 2015 with an aim to promote holding gold in paperless form and to reduce dependency on physical gold by slashing their imports. Now that the gold imports have subsequently come down, the Ministry of Finance is taking into account to stop the issuance of SGBs from the upcoming FY25-26.

 

SGB investors earn value similar to physical gold at maturity. This adds up to government’s liability as the interest earned needs to be regularly passed on to the investors, leading to financial burden. Also, to tackle this burden, RBI had even announced an early redemption for SGBs issued between May 2017 and March 2020 in August 2024. Moreover, new tranches of SGBs haven’t been issued since the start of FY25 till date. This has led to heightened speculations regarding SGBs starting to see discontinuation soon. 

 

The government has decided to bring down the debt-to-GDP ratio from FY27. Given the high cost of SGBs, the continuation of these bonds appears uncertain," said Colin Shah, MD, Kama Jewelry. 

Why does this matter? 

As per Aakar Rastogi of Value Research, Sovereign gold bonds (SGBs) have long been a reliable choice for investors looking to buy gold.

 

That's because SGBs

• Are backed by the government, which means they are safe.
• Make you extra money. They provide a 2.5 per cent annual interest over and above the appreciation of gold price. The interest is paid every six months.
• They are tax-efficient. If they are held until maturity, the gains are tax-free.

 

What are the other options for investors?

You can go to the stock exchange to buy and sell SGBs.

 

"However, they are currently available at a premium, making them less attractive to cost-conscious buyers. For instance, the SGB tranche issued in February 2024 is trading at a premium of nearly 12 per cent. This means that investors buying it at this point will have to hope that gold prices go up 12 per cent for them to break even," said Rastogi.  

Sovereign Gold Bonds (SGBs) maturing in and after 2030 ( Source: Value Research) 

 

   

Gold ETFs (exchange-traded funds) 

Gold ETFs (Exchange-Traded Funds): Gold ETFs are exchange-traded funds (ETFs) that aim to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. One Gold ETF unit is equal to one gram of gold and is backed by physical gold of very high purity. Gold ETFs are listed and traded on the exchanges like a stock of any company. 

 

Who should opt for ETFs? Investors with an existing demat and trading account. 

Benefits: Lower expense ratios and real-time trading.

Drawbacks: They require a demat account, which incurs brokerage fees. Demat accounts do not support systematic investment plans (SIPs) , either. 

 

Gold FoFs (fund of funds) 

A Gold FOF is a passive fund which invests in Gold Exchange Traded Fund (ETF). So, they have all the features of any other mutual fund like SIP option, lump sum option, small investment and withdrawal at any time but with the underlying asset being gold ETF which further invest in physical gold.

 

Who should opt for FoFs? Investors without a demat account or those seeking simplicity. Benefits: Allows investments through SIPs and is beginner-friendly.

Drawbacks: Slightly higher expense ratios compared to ETFs.

 

Why shouldn't I directly invest in physical gold?

Because it has storage and security issues. Unlike SGBs or gold ETFs, physical gold doesn't offer any interest or dividends.

 

"For those seeking simplicity, gold FoFs provide a practical alternative, while gold ETFs cater to cost-conscious investors with demat accounts," said Rastogi.