Returns from SGB investment: If you want to invest in Sovereign Gold Bonds by buying them from stock market such as the NSE and BSE, it is important to understand how much you will gain from them

Fresh SGB issuance unlikely: How much will you gain if you buy Sovereign Gold Bonds from stock market Analysts are of the view that there will be no more SGB issuances in the future

It has been more than eight months since the new financial year 2024-25. However, there has not been a single issuance of SGB so far. Moreover, the government has not announced any new issues of Sovereign Gold Bonds (SGBs) for the remaining part of this year. Many analysts are of the view that there will be no new SGB issues in the future due to the customs duty cut on gold made by the government in the Union Budget 2024.

Anand K. Rathi, Co-Founder of MIRA Money, says, "I believe we have seen the last of Sovereign Gold Bonds. Although the government tried to implement this initiative, it turned out to be quite expensive for them. The SGB program was launched in 2015, during which approximately 67 issues were made, mobilizing around Rs 72,000 crores. The total interest paid out amounted to about Rs 3,500 crores, and due to rising gold prices, the loss incurred was around Rs 32,000 crores. Additionally, the government waived capital gains taxes, resulting in an estimated loss of Rs 3,200 crores. The government faced a financial burden of Rs 38,700 crores because of the SGB initiative. If the government had chosen an alternative method of borrowing, such as offering a straightforward 7% interest rate, the total loss would have been about Rs 10,000 crores. Consequently, the SGB program has proven very costly and slowed down significantly in the past two years."

Also read: This SGB series has premature redemption price 158% higher than issue price

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. However, the core issue remains whether you will gain more by buying the SGB from the stock market.

How returns are calculated from SGB
Apart from giving you returns based on gold price movement, SGB offers additional returns in the form of semi-annual interest payments. Therefore, any comparison needs to be done by comparing the overall returns. Calculating it was quite simple when you bought it through the primary market when it was issued by the government. However, when you buy it from the stock market, the calculation needs to be done differently.

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Calculating the returns if you buy SGB from stock market

Here is an example to understand how much you will gain or lose as an investor if you buy the SGB from the stock market.

The closing price of SGB 2.5% June 2030 SR-I 2022-23 at the National Stock Exchange was Rs 8,100 on December 3, 2024. The issue price of this SGB was Rs 5,091 per gram. Individual investors making investments and payments online were given a Rs 50 discount. The issue price of SGB for such investors Rs 5,041 per gram. The SGB is issued in terms of per gram, and assuming an investor bought 10 grams of gold for Rs 50,410. The investor will get the interest payment based on the issue price i.e., Rs 5,091. If a new investor bought this bond on December 3, 2024 via stock exchange, he/she would have paid Rs 81,000 for a 10-gram gold bond.

As the gold bond is bought, the new investor will receive interest payments every six months starting from December 28, 2024, until June 28, 2030, totalling 12 interest payments. On maturity, the new investor will receive the final interest payment and the average of the prevailing price of gold back.

As per the SGB redemption rules, "The Gold Bonds shall be redeemed in Indian Rupees and the redemption price shall be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited." The average price of gold from IBJA preceding December 3, 2024, is Rs 7,623 per gram. The price of SGB on the stock exchange is higher than the average price of gold.

ET Wealth has taken three scenarios in which gold gives 8%, 10% and 12% CAGR in the periods between June 2022 and June 2030 i.e., during the period of SGB investment. If you buy SGB from the stock market now, here's how much you will gain or lose as an investor.

SGB Issuance Date	June 28, 2022
SGB Issuance price (10 gram gold bond)	50910
SGB Issuance Price (After discount)	50410
Average Current Gold Price (SGB Method)	76445
Current price of SGB in Stock Market	81000
Semi annual interest payout (12 pending)	636.375
SGB Maturity Date	June 28, 2030

SGB Issue Price in June 2022 (10g gold)	50910	50910	50910
Assumed annual returns (CAGR) on Gold*	8%	10%	12%
Assumed Gold Price on Maturity in June 2030	94230.86	109130.11	126051.29
Total interest payment received (Remaining Period)	7636.5	7636.5	7636.5
Overall return (XIRR) on SGB during full tenure of 8 years	10.14	12.04	13.95
Current gold price as per SGB method**	76445	76445	76445
Returns (CAGR) on gold between Dec 2024 to June 2030 if you buy physical gold now	3.88	6.69	9.52
Return (XIRR) on SGB between Dec 2024 to June 2030 if you buy from stock exchange now	4.38	7.05	9.76
Net benefit (XIRR) when you buy through stock exchange	0.50	0.37	0.24

* From the day of investment through primary market (RBI) into SGB, ** As on Dec 3, 2024.

Gold gives 8% CAGR between June 2022 and June 2030
If gold gives an 8% CAGR between June 2022 and June 2030, then the SGB gold bond has an edge over physical gold, despite giving low returns. If the gold prices are appreciated by 8% during the 8 years between June 2022 and June 2030, then SGB gold bonds will give 4.41% returns. On the other hand, the physical gold will give 3.31% returns.
At the time of maturity, the SGB gold bondholder will get Rs 94,867 which includes the final interest payment as well.

Gold gives 10% CAGR between June 2022 and June 2030
Assuming gold prices grow at 10% CAGR between June 2022 and June 2030. The prevailing price of gold in June 2030 comes out to be Rs 10,913 per gram. If an investor buys SGB at Rs 8,100 and holds the SGB gold bond till maturity, then he/she will get a 7.10% return on investment. On the other hand, buying physical gold today at the average prevailing price and holding it till maturity will give 5.67% only.

The SGB investment gives a higher return than the physical gold investment due to the semi-annual interest payment received by the bondholder. The SGB gold bondholder will get an interest of Rs 636.375 every 6 months. On maturity, the SGB gold bondholder will get Rs 1,09,766 which will be inclusive of the final interest payment as well.

Gold gives 12% CAGR between June 2022 and June 2030
If gold prices appreciate by 12% CAGR, then the return from the SGB gold bond has an edge return from physical gold prices. The SGB investor will earn a 9.81% return by buying gold bonds from the stock exchange. On the other hand, physical gold will deliver a return 8.04%.

Do remember that interest payments from SGB received by the investors are taxable in the hands of an investor. However, the maturity amount received is exempted under Income tax laws. Hence, the final return may vary as per the investor's applicable income tax slabs.

Further, the returns from SGB are calculated based on current prices. If the prevailing prices of SGB on the stock exchange go higher, then the return advantage may change.

Things to keep in mind before buying SGBs from stock market
Investors should keep certain things in mind while buying SGBs from the stock market. Rathi says, "The secondary market lacks liquidity, often leading to significant buyer-seller disparity, price differences, and considerable volatility between buying and selling prices. While the liquidity is relatively low, meaning that if you want to buy thousands of SGBs, you might only be able to acquire two or three in a day, it's not all doom and gloom. If you're considering purchasing a smaller amount, you might give it a try. However, be aware that the price disparity will likely affect your overall returns. It's a trade-off between potential gains and the risk of price disparity."

However, if you hold the SGB gold bond until maturity, you may not face any liquidity issues.

This story originally appeared on: India Times - Author:Faqs of Insurances