Sovereign gold bonds shine in FY24 as high returns attract investors

Sovereign Gold Bonds (SGBs) are back in favour and the response in FY24 has been close to their record annual response seen during FY21.  In FY21, when, for a large part of the year, jewellery stores were shut due to Covid-induced lockdown, 32.4 tonnes of SGBs were subscribed in 12 tranches, one every month. Then, SIP in SGBs was proposed by investment experts.

However, in the ongoing financial year, only one tranche per quarter has been announced and in three quarters so far, 31.6 tonnes of SGBs were subscribed for by investors. The next tranche of SGB is in March 2024, and along with the previous three tranches, the total for FY24 is expected to cross the FY21 record subscription level of 32.4 tonnes.

Experts say that the SGB market is now maturing. The reason for the good response in FY21 and FY22 was because of the lockdown and as the jewellery stores were not open while SGB buying was possible through net banking. FY23 saw a dip in gold bond subscriptions leading to speculation that investors are losing interest after the lockdown blues were over.

However, this year’s revival has been very strong and the total subscription of the first three quarters is 157 per cent higher than FY23’s subscriptions. Some of the leading online brokerages have also started selling SGBs on their terminals.

Debajit Saha, lead analyst, metals at LSEG said, “The SGB market has matured as seen from the response and it will continue to be so going forward. The sovereign guarantee also attracts investors. This is leading to a strong belief in the product (which) is attractive and the rising middle class is increasing exposure to gold bonds following rising prices and returns.”

Since its launch in FY16, a total of 134.2 tonnes of gold have been sold under SGBs. This being purely a financial product, it means that a similar amount of imports has been saved.  

Ghazal Jain, Fund Manager, Quantum AMC said, “The response to SGB has been strong of late because of fewer tranches being announced. Also, encouraging returns of the first tranche, which recently matured, is likely making investors chase past returns.”

SGBs are also being aggressively pushed to investors through various intermediary channels. In the future, the appetite of the government to continue issuing these bonds should shape the SGB market, Jain added.

“While SGBs are a good long-term investment avenue with interest payouts and taxation advantages, liquidity limitations remain a drawback,” she said.

Gold bonds mature after 8 years, and all returns are exempted from capital gain tax. This has led to double-digit tax-free returns in the first trance which matured at the end of November 2023. Apart from that, every year bond investors get 2.5 per cent interest on the value of the investment.

According to calculations, the SGB issued in the first tranche in FY16 at a price of Rs 2,688 and redeemed Rs 6,132 has delivered a compounded annual return of 10.9 per cent in eight years. This excludes the interest paid for half years during this period.