'Sovereign Gold Bonds not worth buying at any price from secondary market': Experts on SGB trading

Sovereign Gold Bonds (SGBs), since its launch in 2015, have been one of the most popular gold investment backed by the government and the Reserve Bank of India. SGBs are financial instruments issued by the Reserve Bank of India on behalf of the Government of India. These bonds are denominated in grams of gold and serve as an alternative to owning physical gold. Investors are required to purchase the bonds at the issue price using cash, and upon maturity, the bonds will be redeemed for cash. Since February, no new SGBs have been issued. 

In the absence of any communication regarding the issuance of Sovereign Gold Bonds (SGBs) by the government during the current financial year, there has been a noticeable surge in demand for these bonds in the secondary market over the past few months. The increasing scarcity of SGBs is the primary driving factor behind this escalating demand. 

Starting in 2015, the central bank has launched a total of 67 Sovereign Gold Bond (SGB) tranches, issuing approximately 14.7 crore units. These SGBs are listed and actively traded in the cash segment of both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Retail investors have the opportunity to conveniently buy and sell these bonds through their demat accounts.

In secondary markets, these SGBs are offered with varying residual maturity periods, allowing investors to align their investment goals with the appropriate horizon timeframe. This flexibility enables investors to make informed decisions based on their individual financial objectives and preferences.

“This scarcity has heightened interest from retail investors who seek to acquire SGBs before future issuances or anticipate rising prices driven by increasing demand,” Feroze Azeez, Deputy CEO, Anand Rathi Wealth, noted.

Buying SGBs from secondary market

SGBs are actively traded on the Reserve Bank of India's (RBI) Retail Direct online portal. It's worth noting that trading in SGBs has seen a significant increase in August, as the traded volume reached Rs 53 lakh as of August 26. This is a stark contrast to the previous month's volume of Rs 15 lakh (as of July 29) and the mere Rs 1 lakh traded in June 2024 (as of June 30), as per RBI data.

For September, data showed that trading volume stood at Rs 22 lakh as of the second week. Historically, SGBs had been trading at a discount due to the frequent issuances from the RBI, causing sellers in the secondary market to offer discounts to entice buyers, making secondary market purchases a compelling proposition.

Interestingly, the scenario shifted after February 2024 when no new bonds were issued, leading to SGBs starting to trade at a premium. Despite the inflated prices, many investors are still convinced of the appeal of SGBs and are willing to purchase them even at premium rates.

Should you buy SGBs from secondary market?

“While SGBs are a sound investment, they aren’t worth buying at any price. The interest income you earn from them will not justify paying a high premium,” said Deepesh Raghaw, a Sebi-registered investment adviser.

He explained that investors when making secondary market purchases should assess the remaining tenure of the bond. Greater remaining maturity typically translates to higher accrued interest. It is recommended to scrutinise the 'ask' price and target bonds that are trading close to their face value or the current market price of gold.

For a more precise evaluation, Raghaw proposed a methodology that states that with the knowledge of the residual maturity, face value, and interest payments schedule over the bond's remaining lifespan (maturity value unspecified), investors can input these interest cash flows into a spreadsheet such as Excel. Subsequently, discounting these cash flows to their present value will yield the total present value of the expected payouts.

“If the present value is higher than the current premium, it may be beneficial to buy the bond. Note the interest on SGBs is taxable, hence consider post-tax payouts,” Raghaw added.

Paying a high premium has another risk. If the RBI decides to issue fresh tranches, premiums may disappear, and SGBs could trade at a discount again, making the premium you paid seem like a mistake.

Purchasing SGBs from exchanges

When purchasing SGBs from exchanges, there are two critical factors to consider. Firstly, liquidity is crucial as many SGBs might have low liquidity. Opting for bonds with higher liquidity ensures that you can achieve your desired price. It is noteworthy that the daily average traded volume of overall SGBs on both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) amounted to Rs 13.4 crore.

Secondly, the traded price of the bond concerning the reference rate is significant. The gold price of 999 purity, as published on ibjarates.com, serves as the reference rate for SGBs. It is observed that most SGB series trade at a premium to their reference rate. Investors tend to favor SGB series available near or below the IBJA prices.

Premature redemption 

SGBs are structured as long-term investments spanning eight years, with a mandatory lock-in period of five years. RBI allows investors to redeem at the end of the fifth, sixth, and seventh years after issuance. Shareholders can begin the redemption process within specified timeframes through Receiving Offices, NSDL, CDSL, or RBI Retail Direct. 

Early redemption is based on the average gold price from the previous week, as reported by the India Bullion and Jewelers Association Limited (IBJA). RBI will establish specific redemption periods at the end of the 5th, 6th, and 7th year for investors to redeem their SGBs ahead of schedule. The RBI recently released a schedule for the premature redemption of SGBs issued between May 2017 and March 2020, which includes the redemption of 30 SGBs between October 11, 2024, and March 1, 2025.