{"id":3741,"date":"2022-12-19T13:03:11","date_gmt":"2022-12-19T13:03:11","guid":{"rendered":"https:\/\/www.paytmmoney.com\/blog\/?p=3741"},"modified":"2022-12-26T09:30:14","modified_gmt":"2022-12-26T09:30:14","slug":"sovereign-gold-bonds-sgbs-all-you-need-to-know","status":"publish","type":"post","link":"https:\/\/www.paytmmoney.com\/blog\/sovereign-gold-bonds-sgbs-all-you-need-to-know\/","title":{"rendered":"Sovereign Gold Bonds (SGBs): All you need to know"},"content":{"rendered":"

RBI has just closed the third tranche of SGB for FY22 on 23rd December 2022. The issue price of the bond had been fixed at \u20b95,409 per gram. <\/span>As usual, there was a discount of \u20b9 50 per gram for those who invest online1<\/sup><\/b>.<\/b><\/p>\n

You might be curious to understand more about SGBs, and is it really for you or not, but before that, here\u2019s some context. SGBs are a very unique instrument in their genesis, and its utility, for you, and for the country.\u00a0<\/span><\/p>\n

Indians, as you\u2019d know are crazy about Gold. India is the world\u2019s second biggest consumer of Gold. You might\u2019ve read a lot of articles on surging Gold imports. A few samples below<\/span><\/p>\n

India spends record $55.7 billion on gold imports in 2021: Govt source<\/a>
\nWhy Gold imports into India almost tripled last month<\/span><\/a><\/p>\n

But as always, the story is a bit more nuanced. Yes, India is a big importer of Gold, but India is also a big exporter of gold and jewelry.\u00a0<\/span><\/p>\n

In FY 22, India imported $81 Billion worth of precious metals, gems, pearls and other forms of jewelry making it the second largest item in our import basket. At the same time, we also exported $39 Billion worth of precious metals, gems and other forms of jewelry2<\/sup><\/span>. So while we do import a lot of Gold, a large portion of it is for value addition by our skilled craftsmen, and is exported as jewelry.\u00a0<\/span><\/p>\n

(P.S. The same is true for Crude oil too. Yes it is a fact that we have negligible domestic production of crude oil, but anytime someone throws a number that we import a big number of dollars worth of crude, tell them that a fairly large portion of that is exported. Oil is our largest import item, and also, the largest export item).<\/span><\/p>\n

Back to Gold. While we do export a lot of the gold that we import, our domestic demand for Gold is very high. And while Gold has its use in the manufacturing industry, most of the gold we consume is in the form of jewelry, and the multiplier effect it has on our economic growth, and productivity is marginal.\u00a0<\/span><\/p>\n

One detrimental effect such a large import of Gold has is on our Current Account Deficit, or CAD. CAD is the difference between our exports and imports. If it is a deficit, it means we are importing more from the world, than we are exporting. In FY23, our CAD is expected to be $110 Billion, or about 3.3% of our GDP3<\/sup><\/span> .\u00a0<\/span><\/p>\n

While a CAD per se isn\u2019t bad for the economy (USA has a CAD of ~3.6% of GDP), a large CAD puts pressure on our currency and our Forex reserves (Unlike USA, where the world has an insatiable demand for USD, the strength of Rupee depends on how our economy is doing, and our CAD, among other factors) . And to have the CAD driven by a not so productive asset like Gold is a big cause of concern for the economy.\u00a0<\/span><\/p>\n

So the Government and the RBI came up with an intelligent plan to reduce our import of Gold. They came up with an instrument called the<\/span> Sovereign Gold Bond (SGB).\u00a0<\/b><\/p>\n

What Is Sovereign Gold Bond (SGB)?<\/b><\/h3>\n

SGBs are innovative instruments issued by the Government (so your investment is guaranteed by the Government), which give you the returns of Gold (Yes, the same.. If gold prices go up, SGB prices will go up, and if gold goes down, SGB prices will go down), and an additional interest of 2.5%. Not just that, SGBs are listed on the stock exchanges, so you can buy\/sell them anytime you want. The Govt also provides some tax benefits vis-a-vis physical gold (more on that later).\u00a0\u00a0<\/span><\/p>\n

SGBs are innovative in that they give the returns of Gold, without the country having to physically import the Gold, thus improving our CAD and helping our currency.\u00a0<\/span><\/p>\n

Why SGBs?<\/b><\/h3>\n

So why should you consider Gold, and Gold via the SGB route? Before we compare SGBs with other ways of getting Gold (Gold ETFs, physical gold), let\u2019s understand why Gold is a very important part of your asset allocation.\u00a0<\/span><\/p>\n

You would\u2019ve read a lot of articles on the returns of Gold against Nifty, and statistical concepts like correlation thrown about. So here is a table showing the returns of Gold against Nifty.<\/span><\/p>\n

\"table<\/p>\n

Nifty returns are Nifty Price returns (www.niftyindices.com)<\/span><\/i><\/p>\n

Gold returns are returns of Nippon Gold ETF, on NSE<\/span><\/i><\/p>\n

But the real reason you should invest in Gold is not the returns, but the benefit of diversification. We have all heard about the benefits of diversification, but let\u2019s make it tangible for you. The reason you should invest in Gold is the benefit it provides to your portfolio during bad times.\u00a0<\/span><\/p>\n

On a 12 month basis, whenever Nifty is negative (which, like it or not, has happened once every 4 years), Gold gives you <\/span>positive returns of 22%<\/b>! So what this means is that when your equity portfolio is going through its toughest times, Gold cushions your portfolio.\u00a0<\/span><\/p>\n

Let\u2019s go through a few instances.\u00a0<\/span><\/p>\n

\"\"<\/p>\n

Nifty returns are Nifty Price returns (www.niftyindices.com)<\/span><\/i><\/p>\n

Gold returns are returns of Nippon Gold ETF, on NSE<\/span><\/i><\/p>\n

You can clearly see the benefit of Gold during tough times.\u00a0<\/span><\/p>\n

Now that you have a better understanding of the utility of Gold in your portfolio, let\u2019s see the ways in which you can invest in Gold, and which is the right approach for you.<\/span><\/p>\n

So there are 3 main ways in which you could <\/span>invest<\/b> in Gold<\/span><\/p>\n