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SGB issued in Mar 2016 has given 126% return in 8 years. How does that compare with FDs and equity mutual funds?

The Mar 2016 SGB showcased a fantastic return on maturity compared to other investment avenues like fixed deposits and some equity mutual funds.

SGB issued in Mar 2016 has given 126% return in 8 years. How does that compare with FDs and equity mutual funds?


Posted on 25 Mar 2024
Author: Sayan Sircar
10 mins read
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The Mar 2016 SGB showcased a fantastic return on maturity compared to other investment avenues like fixed deposits and some equity mutual funds.

SGB issued in Mar 2016 has given 126% return in 8 years. How does that compare with FDs and equity mutual funds?

This article is a part of our detailed article series on the new issues of Sovereign Gold Bond (SGB) and well as maturity of existing SGBs. Ensure you have read the other parts here:

📚 Topics covered:

Which SGB series we are discussing here?

SGB 2016 Series II SGBMAR24 Maturity Press Release

This is the third SGB that was ever issued way back in Mar 2016.

Series 2016 Series II SGBMAR24
Issue date 29-Mar-2016
Issue Price ₹2,916
Interest 2.75%
Maturity date 28-Mar-2024
Maturity price ₹6,601 (tax free)
Headline return % 126%
Gold price return 10.75%
Rupee fall vs USD 25.94%
Total interest received ₹642 (taxable at slab)
XIRR (no tax on interest) 12.80%
XIRR (30% tax on interest) 12.18%

The SGB has given a return higher than the gold price due to the interest paid every six months.

Related:
Frequently asked questions on Sovereign Gold Bonds (SGB): the complete guide

How much return did this SGB give?

If you had bought and held this SGB until maturity, then this is the return you would have got based on the amounts you paid, the intermediate interest you got and the final maturity value:

Date Description No tax 10% tax 20% tax 30% tax
Mar-16 Investment -2,916 -2,916 -2,916 -2,916
Sep-16 6-m interest 40.10 36.09 32.08 28.07
Mar-17 6-m interest 40.10 36.09 32.08 28.07
Sep-17 6-m interest 40.10 36.09 32.08 28.07
Mar-18 6-m interest 40.10 36.09 32.08 28.07
Sep-18 6-m interest 40.10 36.09 32.08 28.07
Apr-19 6-m interest 40.10 36.09 32.08 28.07
Oct-19 6-m interest 40.10 36.09 32.08 28.07
Apr-20 6-m interest 40.10 36.09 32.08 28.07
Oct-20 6-m interest 40.10 36.09 32.08 28.07
Apr-21 6-m interest 40.10 36.09 32.08 28.07
Oct-21 6-m interest 40.10 36.09 32.08 28.07
Apr-22 6-m interest 40.10 36.09 32.08 28.07
Oct-22 6-m interest 40.10 36.09 32.08 28.07
Apr-23 6-m interest 40.10 36.09 32.08 28.07
Oct-23 6-m interest 40.10 36.09 32.08 28.07
Mar-24 Maturity 6,641.10 6,637.09 6,633.08 6,629.07
28-Mar-24 XIRR 12.80% 12.60% 12.39% 12.18%

It is important to note that to get the return in the table above, which is a calculation similar to that of Yield To Maturity or YTM of a bond, the intermediate 6-monthly interest payments must be also invested in SGB, if needed from the secondary market: How to buy SGB from the stock market?.

Simply adding the gold price return with the interest rate will not give the return of the SGB since the interest also has to compound at the same rate.

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Comparing this SGB return with other investments

We all know that SGB gives the highest returns out of all types of gold investment: The Ultimate Guide to Which Type of Gold Gives the Best Returns.

We can see that the SGB has given a return higher than the gold price movement (10.75%) over 8 years due to the interest it pays out.

Please note that the rupee depreciation against the US Dollar, since most of our gold is imported, reduces the headline 126% return by 25.94% or the yearly return to a more pedestrian 7.60%.

We will now compare this SGB return to other asset classes starting with FD.

Comparing with fixed deposit

SBI was giving 5-10 year FDs offering a modest 7% for non-senior citizens which would have course give a return much lower due to tax. Other banks would have given higher returns but their risk would have been higher as well though all banks are covered under DICGC insurance.

Investment No tax 10% tax 20% tax 30% tax
SGB 12.80% 12.60% 12.39% 12.18%
FD 7.00% 6.30% 5.60% 4.90%

To understand if you should invest in SGBs:

Comparing with mutual funds

If we look at the universe of all equity mutual funds, and exclude thematic and sectoral funds from it, there were 125 funds at the time of issuance of this SGB which are still active today.

If we consider the 30% post-tax return case, the following funds have been beaten by the SGB.

Fund Return pre-tax Return after-tax
PGIM India Large Cap Fund 4.95% 4.52%
Taurus Flexi Cap Fund 12.41% 11.53%
LIC MF Flexi Cap Fund- 12.73% 11.84%
Taurus Large Cap Fund 12.86% 11.96%

If we assume zero tax in both cases, then the following funds have been beaten by the SGB.

Fund Return pre-tax Return after-tax
PGIM India Large Cap Fund 4.95% 4.52%
Taurus Flexi Cap Fund 12.41% 11.53%
LIC MF Flexi Cap Fund- 12.73% 11.84%
Taurus Large Cap Fund 12.86% 11.96%
Franklin India Bluechip Fund- 13.62% 12.68%

Note: All of these are direct plans and regular plan returns would have been obviously worse: Do not make this mistake when investing in mutual funds.

Readers should understand that this comparison of two different asset classes should be done not on this point-to-point fashion but using rolling returns only: What are rolling returns in case of mutual funds? Why is this better than point-to-point returns?

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This post titled SGB issued in Mar 2016 has given 126% return in 8 years. How does that compare with FDs and equity mutual funds? first appeared on 25 Mar 2024 at https://arthgyaan.com


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