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Sovereign Gold Bond (SGB): Which Series is Best for You?

This article explains which Sovereign Gold Bond (SGB) series should be bought from the stock market if you are planning to invest in SGB.

Sovereign Gold Bond (SGB): Which Series is Best for You?


Posted on 27 Aug 2023
Author: Sayan Sircar
7 mins read
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This article explains which Sovereign Gold Bond (SGB) series should be bought from the stock market if you are planning to invest in SGB.

Sovereign Gold Bond (SGB): Which Series is Best for You?

📚 Topics covered:

This article is a part of our detailed article series on the concept of Sovereign Gold Bond (SGB). Ensure you have read the other parts here:

What is the value of a SGB?

A Sovereign Gold Bond (SGB) is a piece of paper issued (in digital form) by the Government of India with the following features. For every unit of SGB purchased, the investor will:

  • buy it when issued at the current price of 1 gram of gold
  • get 2.5% interest (paid as 1.25% every six months; fully taxable at slab rates) on the invested amount
  • get back money as per the prevailing price of gold in eight years. Money received may be higher or lower than the purchase price and cannot be predicted in advance
  • if desired, sell it via the stock exchange five years after issuance
  • there are no capital gains taxes if held until maturity for eight years. Else, you will need to pay taxes based on the holding period

How to invest in SGB?

SGB is available for purchase in two ways:

  • primary issuance as per RBI notification
  • secondary purchase from the stock market

In this article we will consider the best options for buying SGB from the stock market. This article is the companion article to our SGB purchasing guide here: How to buy SGB from the stock market?.

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What is the value of an SGB in the stock market?

The price of an SGB in the stock market depends on the demand and supply of the SGB apart from its intrinsic value.

Price of SGB = Intrinsic value + Demand-supply effects

Intrinsic value depends on two things:

  • the current market price of 24-karat gold
  • the present value of all the interest payments yet to be received

The effect of demand-supply factors is unpredictable. Therefore it is important that we understand how to calculate the intrinsic value of the SGB.

Also read
What should debt, international and gold mutual fund investors do now that these funds are taxable at slab rate?

How to calculate the intrinsic value of an SGB?

Intrinsic value = Gold price + present value of interest payments

Note: In this article, we are not adjusting for the dirty price concept which means that an additional term for the accrued interest.

Gold price comes from the India Bullion and Jewellers Association (IBJA) website for 999 purity gold. The IBJA website is here: link.

The interest rate is 2.5% on the face value of the bond paid at the rate of 1.25% every six months. This interest is taxable. To calculate the present value of these remaining interest rate payments we will look at this sample SGB quotation page from NSE:

SGB NSE Page

Here the first 3 units of SGB (see the order book) are available for purchase at 5,948. This is a March 2025 bond (see the name on top) which will mature in March 2025. The present value of the interest payments is given by this Excel formula:

PV = ([[Issue Price]] * [[Interest Rate]]/2 * (1 - (1 + (Discount Rate/2)) ^ -(([[Maturity Date]]-Today’s Date)/365.25 * 2))) / (Discount Rate/2)

where

  • Issue price or face value is the price at which this SGB was issued = ₹2,943
  • Interest Rate = 2.5% which is the yearly interest received on the issue price
  • Discount Rate is our cost of capital which is the least return we can get easily like an FD rate
  • Maturity Date is in March 2025 (assumed 31-Mar)

Once you have the PV, the intrinsic value of this SGB is PV + IBJA gold price.

If the SGB is quoted lower than this number, then you should buy it.

Should you simply buy the cheapest SGB by intrinsic value?

If you are planning to accumulate gold for any purpose, first choose among SGBs maturing just before that date. If there is no particular date, you can buy the cheapest (relative to intrinsic value) long dated SGB that is available.

Should you calculate the YTM of an SGB?

Yield To Maturity (YTM) is a concept that is applicable to bonds where the maturity amount is known. SGB, though has the word Bond in the name, is not actually a bond. The maturity value of the SGB depends on the gold price just before the maturity date and is unknown today. Therefore the concept of YTM is not applicable.

There are many calculators online that show the YTM of SGBs by setting today’s gold price as the maturity value. That concept is flawed as explained above.

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This post titled Sovereign Gold Bond (SGB): Which Series is Best for You? first appeared on 27 Aug 2023 at https://arthgyaan.com


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