Explained: This is what makes Sovereign Gold Bonds better than bank FD or even 10-year G-Sec

The Reserve Bank of India opened the first tranche of Sovereign Gold Bonds 2023-24 for subscription earlier this week. The bond, backed by the Central government, is available at an issue price of Rs 5,926 per gram of gold. The last date to apply for the subscription was till Friday, June 23, with June 29 as the day of settlement. The Sovereign Gold Bond will pay a fixed rate of return of 2.5 per cent a year, payable twice a year on the nominal value.

The guaranteed rate of return on SGBs makes them an attractive risk-free investment option along with government bonds and fixed deposit schemes offered by various lenders.  So, which one you should pick to park your hard-earned money while earning a guaranteed rate of return?

There are a series of factors that need to be considered before making this choice. From the quantum of money you are looking to invest, to the time and risk premium involved everything needs to be taken into consideration.

What is the market risk premium?

Market risk premium is essentially the relationship between returns from an asset portfolio and treasury bond yields. Every investment has a risk factor involved with it. However, debt securities issued by the government are considered risk-free investments. Such investment offers lower returns compared to more volatile options like stocks. Sovereign Gold Bonds, Government Bonds and FDs are among the lower return yielding options available to the common investors.

SGBs Vs Government Bond Vs FDs

In the case of SGBs, the government offers a guaranteed 2.5 per cent return rate on the amount of initial investment. The interest is credited half yearly to the bank account of the investor whereas the last interest will be played on maturity along with the principal. While the tenor of the bond is 8 years, redemption is allowed after the fifth year.

For fixed deposits, the rate of return varies somewhere between 3.5 to 8 per cent depending on the tenure and the amount. The investment in FDs is secured with an insurance cover of Rs 5 lakh by Deposit Insurance and Credit Guarantee Corporation. The depositor received the insurance cover on liquidation of the bank.

Bond yield is the return that you get on investment in bonds. The yield is calculated after dividing the annual coupon rate by the current market price of the bond. This means there is an inverse relationship between the yield and the price of a bond. When the price of a bond goes up, the yield falls. While the risk involved is negligible the return faces some fluctuation. At present, a G-sec bond with a 9 to 10 year maturity is offering 7.47 per cent.

Unlike FD where there is a certain lock-in period involved, SGBs and government bonds are highly liquid and can be traded easily in the secondary market. This gives a window to earn better returns on the bonds and exit anytime you want before maturity.

Should you invest in SGBs?

The global gold prices are expected to go further up amid expectations of some ease in the rate hike by the US Federal Reserve. The concerns over market volatility have forced the government to move towards gold.

"It seems a perfect time to buy SGBs and add gold as a strategic asset. Prices are seen consolidating after a sharp advance, and expectations that the US Fed is nearing the end of its rate hike campaign amid receding inflationary pressures are likely to act as a tailwind for gold while suppressing the rival dollar index," Sugandha Sachdeva, Executive Director and Chief Strategist at Acme Investment Advisors, told Zeebiz.com.

According to Sachdeva, global economic slowdown engineered by elevated interest rates probably keep the gold prices floating in the medium to long-term.

“As central banks around the world are buying up gold in record amounts, the precious metal is looking increasingly attractive as a safe haven investment. Besides, lingering concerns of a global economic slowdown engineered by elevated interest rates will keep gold prices buoyant from a medium- to long-term perspective,” she added.

While investment in gold physical or digital comes with the risk of volatility, in the long run the yellow metal is expected to record positive momentum. 

"Though short-term volatility cannot be ruled out, the long-term outlook for the precious metal remains fairly constructive, where it is envisioned to edge higher towards Rs 65,000 and then Rs 68,000 per 10 gm mark from a long-term perspective," she said.