Investors in gold bonds do early encashment as price spikes

Buyers of sovereign gold bonds (SGBs) have prematurely redeemed 1.25 tonnes, clocking a near-doubling of returns on their issue price, Reserve Bank of India (RBI) data showed.

The redemption comes as gold bonds have gained over 18% over the past four months to a record ₹7,325 a gram by April. The bonds that had an issue price of ₹376.34 crore were redeemed at ₹731.4 crore, marking a cumulative profit of ₹355 crore.

Investors who subscribed to the bonds back in August 2016 to those who invested in February 2019 went in for early redemption, which is allowed after the fifth year from issue of the bonds on coupon repayment dates.

The lock-in period is eight years from the issue date, with early encashment allowed after fifth year from the issue date on coupon payment dates. These bonds offer a simple interest of 2.5% on the issue price.

Price rise

“The rally in prices this year was a draw for investors, some of whom went in for early redemptions,” said Gaurav Dua, head of capital market strategy, Sharekhan by BNP Paribas.

The price rise was fuelled mainly by the rising tensions between Iran and Israel in April, and expectations of potentially softer rates in the US. However, the de-escalation after 12 April between the two nations and recent indications that US rates would remain higher for longer on inflation expectations caused gold to correct from its record high of ₹7325 a gram to ₹7167 on 7 May. All the rates exclude the 3% GST.

Personal finance experts like Amol Joshi of PlanRupee Investments said investors should diversify their portfolios by allocating 15-20% funds to precious metals like gold, alongside 80-85% to core asset classes such as equities and debt.

“Prevalent geopolitical tensions and higher-for-longer global interest rates make portfolio diversification all the more imperative, and gold bonds are the ideal choice with the draws being tax-exempt capital gains and simple interest on issue price,” said Joshi.

Gold bonds to equity

Some have invested profits from gold bonds in the equities market, said A. Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC.

“A few investors who put money into SGBs are deploying the returns into stock markets, whose returns have been superior to those of gold,” said Balasubramanian.

A comparison of returns of gold bonds over eight years from August 2016 to February 2024 — ₹3,152 per gram return on issue price of ₹3,119- reveals an annualized return of 9.12%, excluding simple interest of ₹623.8. Over the same period, Nifty Total Returns Index, which captures stock price movement and dividend receipts of its constituents, has posted annualized return of 13.49% at 32127.90.

“Interest rate updates will likely influence prices in the near future. Currently, MCX gold is expected to trade within the range of ₹70,000-72,000,” said Jateen Trivedi, vice-president and research analyst, commodity and currency, LKP Securities.

A revamped sovereign gold bond scheme was introduced in FY16 to wean individuals away from physical gold, which puts pressure on forex and contributes to a widening current account deficit and weaker rupee .

The scheme has succeeded in inducing investors to paper gold, with total 140.8 tonnes outstanding as of February. Totally, 6.1 tonnes have been redeemed since the scheme began.

Bonds are issued in 1g denomination with a 4 kg maximum investment for an individual and HUFs, and 20 kg for trusts and similar entities notified by the government per fiscal year.