The first ever tranche of Sovereign gold bonds (SGB) issued by the Reserve Bank of India (RBI) is due for maturity this month. Going by the current trend of gold prices, the investors are likely to earn good returns on the investment made by them. The issue price of first SGB in 2015 was Rs 2,684 per gram.
The Reserve Bank of India (RBI) issued the first tranche of Sovereign Gold Bonds (SGB) in November 2015. Investors in this maiden tranche of SGB are set to get a bonanza when the bonds finally mature on November 30, 2023., This is because in the last 8 years, the price of gold has more than doubled. The maturity price of the SGB is yet to be determined and announced by the RBI. However, going by the current gold rate, the bonds will give good returns on maturity.
As per the SGB scheme guidelines, “The redemption price shall be fixed in Indian Rupees on the basis of the previous week’s (Monday – Friday) simple average closing price for gold of 999 purity, published by India Bullion and Jewellers Association (IBJA).”
The RBI recently announced the premature redemption price of SGB scheme for 2017-18 Series I. The price has been set at Rs 6,116 per gram of gold. The price is set based on the simple average closing gold price for the week October 30 and November 3, 2023. Hence, going by the trend, it is likely that the price at maturity of the first SGB issue would be somewhere around this price.
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It is important to note that the purchase price for the first SGB issued was fixed at Rs 2,684 per gram of gold. The prevailing price is more than twice the issue price. The issue price was arrived at on the basis of the simple average closing price of 999 purity gold of the previous week published by the IBJA.
Returns first issue of SGB are likely to earn
Here is an example to give an idea of the returns an investor is likely to get from the first SGB issue on maturity. Suppose an investor is holding 37 grams of gold via the first issue of SGB. The investment was made at the price of Rs 2,684, making the investment amount equal to Rs 99,308. Assuming the maturity price on redemption is Rs 6,130 per gram, the investor will get Rs 2,26,810. We have taken a higher price than price set by the RBI for premature redemption mentioned above. This is because gold prices usually see an increase around Diwali days.
Also Read: How to buy SGB bonds online through banks
In absolute terms, an individual will earn a return of 128% without taking interest earned on the SGB into account. In CAGR (Compounded annual growth rate) terms, the returns come out to be 10.88%.
As per the notification issued by RBI on October 30, 2015, the SGB offered a fixed interest rate of 2.75% per annum on the initial investment amount. The interest was to be paid on a half-yearly basis. In the example above, an investor will earn half-yearly interest of Rs 1365. Taking interest into account, an individual is looking at an annual return of 13.63%.
Currently, the SGB is offering interest rate of 2.5% per annum.
Total annual return is sum of CAGR and interest rate offered by RBI on the SGB investment. This is done because it is assumed that the half-yearly interest payout received is not re-invested. Further, the interest paid out is half-yearly. If one calculates the annualised return of interest received, it will be higher than 2.75%.
The issue date of the first SGB was November 30, 2015. As per the scheme conditions, the bonds are repayable on the expiry of eight years from the date of issue. Hence, the maturity of the first tranche of SGB will happen on November 30, 2023.
How one invests in SGB
The RBI announces the issue of SGB tranches every financial year. The RBI has revised the minimum and maximum amount of gold. Currently, an investor can invest minimum of 1 grams and maximum of 4KGs per individual per financial year. To make an investment, an individual is required to mention the amount they want to invest in the application form. On the basis of the issue price announced by the RBI, the amount of gold is invested. The balance amount is refunded to the investor’s bank account.
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