The first SGB issued in Nov 2015 has given 128% return in 8 years. Tax-Free

[rupeshmandal]

The first ever SGB - Sovereign Gold Bonds 2.75% NOV 2023 Tr-I was issued on 26 Nov 2015, listed as SGBNOV23 on NSE and 800251 on BSE, with ISIN IN0020150085.

It paid an interest of 2.75% every 6 months until it matured on 30 Nov 2023.

SGB 2015-I Patriculars	Amount (Rs)	Taxability
Issue Price on 26 Nov 2015	2,684.00	No
Interest @2.75% every 6 months = 36.91x16	590.56	As per slab
Redemption Price on 30 Nov 2023	6132.00	Tax Free

Headline Return	128.46%
XIRR (for 30% tax bracket)	12.28%

How did it fare compared to other assets or mutual funds? From the point of view of absolute returns, XIRR, cost (brokerage, TER) and taxability.

[Anubhav_Sarkar]

Among the ones I track: So XIRR (Pre Tax) of SIP and lump-sum in the following Indices from 01/05/2015 are as follows:
Nifty 50 - 14.86% SIP and 12.57% Lumpsum
Nifty Midcap 150 - 21.03% SIP and 18.5% Lump-sum
Nifty Small Cap - 19.78% SIP and 15.25% Lump-sum
So Post Tax, NIFTY 50 would fetch lesser returns than SGB.
I have not really been tracking other Asset classes like Crypto or Real Estate.

[neha1101]

Not an expert, since gold is linked to USD, the currency depreciation could have its effect as well.

on 26.11. 2015 INR to USD was 66.36.
On 30.11.2023 INR to USD was 83.34

The currency depreciation was 25.58%.

How much of headline return of 128.46% as the author says can be contributed to currency depreciation of INR.

I could be totally wrong. Can we really compare Gold with other asset classes as this is mainly used as a safe haven for diversification. Found an article which compares Gold return vs Nifty

Gold vs Nifty Chart - i am market

[rupeshmandal]

I have a question for the experts here.

RBI conceived the idea of Sovereign Gold Bond (SGB) with the underlying thought that when an investor invests in these bonds he will not buy physical gold. This will help in reducing gold imports and the entire cycle that comes with it i.e. buying gold with the depreciating rupee, fiscal deficit, etc.

Now that the first SGB has completed its full life cycle,

1. Were physical gold imports reduced or increased due to SGB in the last 8 years?
2. Do Indians continue to buy gold in physical form compared to the pre-SGB era?
3. How well did the Govt utilize the SGB amount in the 8-year lock-in period? Did it earn enough to repay the 128% return to the investors at maturity? Is this sustainable for the Govt?

P.S.
Following are the SGBs that will mature in 2024.

Symbol NSE	Symbol BSE	Interest per annum	Interest payment dates	Maturity Date	Issue price
SGBFEB24	SGB2016I	2.75%	8th February and August	08-Feb-24	2600
SGBMAR24	SGB2016II	2.75%	29th March and September	29-Mar-24	2916
SGBAUG24	SGBAUG24	2.75%	5th August and February	05-Aug-24	3119
SGBSEP24	SGB2016IIA	2.75%	30th September and March	30-Sep-24	3150
SGBNOV24	SGB2016IIIA	2.50%	17th November and May	17-Nov-24	3007

[rupeshmandal]

The following graph shows India’s love for the shining metal. The question is, where does SGB glitter in between?

Find more statistics at Statista

[cvs]

I don’t think any of these Qs makes sense.
Here’s my take on them…

@rupeshmandal

• Were physical gold imports reduced or increased due to SGB in the last 8 years?

In one sense, Obviously yes. Every rupee in SGB is one less rupee in actual gold.
Practically, not sure if one can accurately measure…

• …what impact SGB itself has had in encouraging investment into SGB.
• …what could have happened if SGB did NOT exist.

@rupeshmandal

• Do Indians continue to buy gold in physical form compared to the pre-SGB era?

Again, obviously yes.
What might be mildly interesting is the volume of actual gold being purchased by individuals.
But what’s the point? Is the aggregate of individuals’ gold purchases even significant / comparable to the volumes of the gold being traded for other purposes (industrial, financial, …)?

@rupeshmandal

• How well did the Govt utilize the SGB amount in the 8-year lock-in period? Did it earn enough to repay the 128% return to the investors at maturity? Is this sustainable for the Govt?

That’s not how sovereign debt works.
Govt. isn’t into earning directly to repay its debt.
Rather economic growth is the target.
In fact increasing Govt. debt might even be desirable as a “shock absorber” under certain scenarios.

All things considered,
IMHO, the existence (and adoption) of SGBs
has established an additional lever for fine-grained control over
the economic impact of Gold to the nation’s economy.

[rupeshmandal]

Is there a way to find out how much money Govt raised yearly through the SGB issue, from 2015 till today? And then if we plot the data against the graph of annual physical gold imports, the comparison may tell whether the ‘Govt’s intent of reducing physical gold imports’ by launching SGB as an asset class was successful.

P.S. I am invested in SGB and this analysis is to understand it in more detail.

[cvs]

@rupeshmandal

And then if we plot the data against the graph of annual physical gold imports, the comparison may tell whether the ‘Govt’s intent of reducing physical gold imports’ by launching SGB as an asset class was successful.

That comparision doesn’t really explain much
as the demand for gold during 2015-2022 in the absence of SGB is not known.

Sure, it can be estimated/forecasted based on historical demand for gold before 2015,
IMHO, such a forecast is unlikely to be accurate due to the unforeseen circumstances (geo-political unrest, pandemic, lockdowns, AI-boom, …) over the past few years.

@rupeshmandal

P.S. I am invested in SGB and this analysis is to understand it in more detail.

You can find quite a few details in the RBI circulars on SGB.
(eg. the data release on SGB.)

The Bonds bear interest at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment.
Interest will be credited semi-annually

The bonds offer 2.5% / annum now (not the 2.75% / annum of the initial tranche).
So, that needs to be factored into the calculations to evaluate the current SGBs.

Interest @2.75% every 6 months = 36.91 x 16 = 590.56

More importantly, this calculation looks incorrect.
Note that even though the interest payment is semi-annual (every 6 months),
the interest quoted in for the whole year (not every 6months).
i.e. half of the annual interest is paid out every 6 months.

Headline Return 128.46%

This is simply based on the capital-gains due to appreciation of Gold over the past 8 years.
This excludes the returns from interest.

This gain due to appreciation of the price of gold
wasn’t something that was known upfront,
nor was/is it guaranteed.

This return of 128.46% over 8 years amounts to 10.88% compounded annually.
(…and the additional semi-annual interest payments
are the additional fixed-returns available on SGBs
apart from the variable gain/loss due to price of gold)

---

Regarding SGBs, here’s another question that comes to mind -
How is it decided when to issue a new tranche/series of SGB ?

[viswaram]

@rupeshmandal

‘Govt’s intent of reducing physical gold imports’ by launching SGB as an asset class was successful.

I have a question. If the central bank buys the gold by clubbing the purchases of independent customers, the import value remains the same right?

[cvs]

SGB is not backed by actual gold.
It is backed by a sovereign guarantee (simialr to GSECs) to pay back upon redemption, the value of gold in INR.

However, unlike GSECs,
the value of SGBs (in the secondary market, and upon redemption)
depends on the value of the gold in the market.

This old topic-thread has few more details and discussion around SGBs

What's the best option to invest in gold?

Indians love their gold. According to a World Gold Council estimate Indians held between 23,000 to 24,000 tons of gold, a majority of it with Indian households. Indians have an emotional attachment with the yellow metal, it’s a significant part of everything from weddings to festivals. For most Indians, gold along with real estate have been the most popular investment options with jewellery being the most common option. Off late other options like Gold ETFs, Digital gold through various online …

[Viral_Jain1]

Has anyone noticed how SGBs which have 5+ years maturity left are trading at a 7-8% premium to actual gold prices in last few days??

Can anyone help me understand this phenomenon

Current SGBs are trading upwards of 7700 per gram when their benchmark cost is more close to 7250…

[Vishnu_Prasath]

It’s surprising. All the SGB’s are trading at a 7-8% premium and the FEB32 expiry (the recent one at almost a 10% premium). It used to be 2-3% cheaper - before 3-4 months - suddenly the SGB’s started trading at 7-8% premium. 2-3 years ago, this used to be 5-7% cheaper (making new subscriptions worthless and secondary transactions in the market worthwhile)

Probably because of the uncertainty in the government launching new bonds as they used to (with the Skipped tranche in June).

If the Government is not releasing any new tranches of SGB - then the demand for all the traded SGB’s will increase proportionate to the value that’s inclusive of all future interests that it’ll earn - as it’s still one of the most attractive investment avenues given that it’s tax exempt.

[siva0]

I think it is mostly due to 1000+ stocks are not eligible for collateral , so most of the big investors turning to SGBs as safe bet compared to equity .

[Vishnu_Prasath]

Even then paying 7-10% premium is not justified if there’s going to be a new tranche released every quarter. Why exert such urgency (while during issue, one could get a discount)?

And the ineligibility for collateral has always been the case. Why was it available at 7% discount earlier, and 2% discount until 2-3 months ago and now suddenly trading at 7-10% premium?

And lastly, big investors cannot turn to SGB’s - because the limitation is upto only 4kg per year per account. That translates into a max cap of 2.8cr in investment per year into SGB (either secondary or primary) - or they get caught during Income Tax filing.

[trader_dude]

After all the analysis , only one conclusion remains and that is to allocate wisely in gold , equity and debt.

One can never predict crisis or economic growth consistently all the time.

[Vishnu_Prasath]

Gold has always responded inversely to any stock market crashes and qualifies based on history to be a hedge to convert during market crisis.

The only questions remains though is - why not ETF’s at market value instead of SGB’s at 7-8% premium?

[trader_dude]

@Vishnu_Prasath

why not ETF’s at market value instead of SGB’s at 7-8% premium?

probably because SGB’s have the 2.5% interest component + the gold price and ETF gold does not have the interest component and the liquidity is low compared to gold ETFs. Hence the premium in SGB’s.

If anyone has better take on it. please add or correct me.

[Vishnu_Prasath]

But why only now in the last 2 months and never before in history (this premium)?

There was actually a discount earlier? There always has not been any liquidity. The only logic where it makes sense is if government wouldn’t be releasing any more new tranches of SGB ever again.

[ykapoor]

I agree. It looks like there won’t be any new tranches of SGB going forward.

[Viral_Jain1]

There could be some more reasons other that government discontinue SGBs …

It can do one or more of the following:

1. Remove the tax exemption
2. remove the interest income
3. clarify on taxation on early redemption
4. remove the discount at the time of subscription