How Successful has the Indian Sovereign Gold Bond Market been?

Gold has proven to be a reliable investment for many years. Sovereign Gold Bonds are a type of bonds issued by the Government of India that provide investors with a means to invest in gold. The first sovereign gold bonds in India were issued in 2015. Gold bonds were first issued in FY16. They have now been in existence for more than eight years. Here’s a quick overview of the amount of gold bonds that the Indian government has issued and raised.

Let’s quickly decipher these numbers. Here are some important takeaways.

• The government of India has issued 67 sovereign gold bonds since the first tranche was issued in late 2015. Most of the tranches were released in FY18 (14), followed by FY21 (12). There were also 10 tranches in both FY20 and 22. These sovereign gold bonds were issued in large numbers around the time of the pandemic.
• How many sovereign gold bonds have the Indian government issued to Indian investors? In the last eight years, 146.96 million grams of gold have been sold. The price at which each tranche was issued varied depending on the metal’s current price. Sixty-two million grams of the 146.96 million grams of gold sold via sovereign gold bonds have been redeemed. The remaining 140.76 million grams are still in the hands of the investors. The government redeems the gold sovereign bonds in full at the end of 8 years. In the meantime, redemption can be done through a special window that opens after the fifth and sixth years.
• Would gold bonds have made a profit over the past 67 tranches of time? Each of these tranches was done at a different price. We can arrive at the arithmetic mean price by combining all 67 of these tranches. This comes to Rs. 4,050 per kilogram. If a person had purchased 1 gram in each tranche, they would have 67 grams of SGBs at an average price of Rs. 4,050 per gram. This translates to an investment of Rs. 2,71,350, which, at the current market rate of Rs. 7,400 per gram, would have been valued at Rs 4,95,800. Your gold portfolio has increased by 82.72%.
• Let’s look at the total wealth created for investors by these sovereign gold bonds (SGBs)) in the last eight years, based on the difference between the original cost and the current market value. Total investment in gold bonds to date is Rs.723 Billion. This would amount to Rs 1,321 Billion. Overall wealth creation through sovereign gold bonds (SGBs) amounts to Rs 600 Billion. SGBs were only intended for Indian investors. This wealth of Rs. 60,000 crore was created in India.

It is important to note that gains from investing in SGBs are not only limited to gold price appreciation. These bonds have an interest rate of 2.5%, and capital gains remain in the investor’s hands if they are held for eight years. The pre-tax equivalent return would, therefore, be higher. Look at the effective returns of the first three tranches of Indian sovereign gold bonds.

What Do SGB Returns Look Like in Tax-Adjusted Terms?

Now, let’s look at these returns in tax-adjusted forms. The capital gains and interest will be treated differently, as capital gains are taxable, but interest is not. The table below shows how tax-adjusted returns will look under different tax rate scenarios. The 3 tranches will have a base yield of 10.880%, 11,635% and 10.753%.

We now have the tax-adjusted returns earned by investors who purchased the first three tranches of the bonds that were redeemed by India. Tax-adjusted returns are based on your tax bracket. The higher the bracket, the higher the pre-tax return you will receive. Only capital gains are exempt from tax and are therefore adjusted to equivalent pre-tax terms. Interest earned is taxable and has therefore been treated as such. Gold bonds are safe instruments that do not have any default risk in terms of the amount of gold or the interest payments. The average yield of the first three tranches was 18.34% for those who are in the highest tax bracket. Let’s quickly see who the sovereign gold bonds are a good investment for.

Whom the Gold Bonds Add Value to?

Investors wonder if they should buy gold bonds and how much they should. Here are some tips to help you decide.

• A study conducted by the IMF found that the average return on gold from 1971 to 2019 was 10.6%. There are only a few instances where gold has given a negative return over an 8-year period. This study was conducted in India between 2006 and 2023.
• We were amazed by what we found. If you had bought gold in the bonds between December 2013 and December 2014, then the returns over the next 8 years (the holding period for SGBs) would only have been positive. What’s more interesting is the numbers we came up with based on this table.
• The average return for all 8 years (we repeated the exercise every month) between December 2014 and December 2023 was 92.21 %. It gets better. You would have received a maximum return of 208.95% on your gold investments over a period of 8 years. The minimum return would have been about 30.87%. You would have not been badly affected even if you had been very unlucky. In the case of sovereign gold bonds, you will also get an additional 2.5% interest.
• Even without the interest paid on SGBs, the average return on gold would be better than inflation.

Investors should remember that purchasing and holding SGBs is a simpler, safer and more cost-effective way to hold gold. The government guarantees the amount of gold in grams and the interest payment. The capital gains from the gold bonds are tax-free if they are held for 8 years. This makes the returns on these bonds much higher.

Investors should keep in mind one thing. Gold is not an asset that can provide growth and income like equity or debt. It is a hedge, which gives it a big advantage in portfolios. Gold is a great hedge because it performs exceptionally well during times of economic, political and geopolitical turmoil. By adding gold to the portfolio to the tune between 10% and 15%, you can reduce the risk while enhancing the long-term returns. Gold is, after all, one of the rare assets that has a negative correlation to equities. The portfolio becomes more robust by adding gold.