top of page

How You Can Buy SGBs at a 5% Discount 💡

The RBI recently issued it’s latest tranche of Sovereign Gold Bonds (SGBs) in August. If this is the first you are hearing of this, you’re in the right place!


Firstly, subdue that feeling of FOMO, because Rupeeting brings you an alternative - buying these SGBs off the stock exchange - which, if you play your cards right, might just lead to some bling in your portfolio!


The Basics

Sovereign Gold Bond is an RBI-backed instrument, with each bond valued at 1 gram of gold. The RBI announces their release a few times a year, and unlike an IPO, you are assured your bonds!

  • Maturity: 8 years, but redemption is possible after the first 5 years have lapsed

  • Investment Limit: For an individual, the minimum investment is 1 gram worth of gold and maximum is 4 kg worth of gold

  • Pricing: Calculated by taking an average of the gold prices on the last three working days of the week before the issue

  • Distributors: Nationalised banks, designated private/foreign banks, Stock Holding Corporation of India Ltd or even the post office!

  • Interest: Fixed 2.5% simple interest per year (calculated on the issue price), payable on a semi-annual basis

  • Tax-Free Gains: If you sell after 5 years or hold till maturity of 8 years, the capital gains (profit made on the rise of gold prices) made on these bonds are tax-free (capital gains tax is 20%)

💡 If you apply via the website of any of the selected commercial banks, you get a Rs. 50 discount off the issue price!


Why Is It Better Than Actual Gold?

Although the feeling of holding physical gold might be rewarding, it has more demerits from an investment standpoint. We will now prove that SGBs are cheaper than physical gold!


Let’s assume that the spot price of 1 gram of gold and one SGB is worth Rs. 5,000.

SGB

Physical Gold

No GST

GST @ 3% = Rs. 150

No Storage Cost

Storage Cost = Rs. 100

No Making Charges

Making Charges @ 5% = Rs. 250

Total = Rs. 0

Total = Rs. 500

Therefore, with SGBs, not only do you make a guaranteed interest, but you also get a virtual discount of 10%, since you don’t have to pay for any of those costs listed above!


Now imagine if you could get these SGBs at a further discount?


Making More Money Off SGBs

If you were busy debating the pros and cons of SGBs and lost the chance to buy it during the latest issue on August 26th, 2022, don’t worry! Just open your demat account and search for SGBs listed on the stock exchange.


Investors who buy these SGBs from the RBI issue have the right to sell them in the secondary market, a.k.a the stock exchange, where anyone with a demat account has access to these.

Chances are, these will be listed at a discount - but why?


This is due to a concept in the market known as price discovery - the process of finding a suitable price that buyers and sellers agree with.


To simplify:

  • Prices are set based on demand and supply in the stock market

  • Since a bulk of the gold trades happen in its physical form in India, SGBs aren’t traded frequently or in high numbers in the stock market - thereby being a demand problem

  • At the time of writing this blog, there were about 50 series of SGBs with varying maturities available in the stock market, yet the quantity of a majority of those ranged between 1 and 200 - thereby being a supply problem

  • Both of these have worked together to provide price discounts between 1-6%, based on how many are available and when they mature

While writing this blog, we checked the prices of listed SGBs and made this observation, taking the most recent SGB issue price of Rs. 5,197 as the benchmark:

NSE Symbol

Maturity

Issue Price

Current Price

SGBAUG24

August, 2024

Rs. 3,119

Rs. 5,001

SGBMAY25

May, 2025

Rs. 2,901

Rs. 4,980

SGBOCT26

October, 2026

Rs. 3,096

Rs. 4,925

SGBJAN27

January, 2027

Rs. 3,164

Rs. 4,875

As visible, all the earlier issues are available at a discount when compared to the latest SGB. Yet, here is why we think that one should consider looking at SGBs that mature later than sooner:

  • The interest component (2.5%) is calculated on the original issue price, which makes older SGBs (the ones that will mature sooner) unfavourable as the interest earned will be lesser than those earned from more recent issues

  • More recent issues have more potential to receive the interest income for a longer period of time

Investors - now is your chance! Buy into the longer maturity bonds that are available at a discount of 4-6%, and hold. You might just get the Midas touch on your portfolio!


As Amitabh Bachchan said, “Aaj khush toh bahut hoge tum”.

14 views0 comments

Comments


bottom of page