The SGB scheme, run by the Reserve Bank of India (RBI) on behalf of the government, has seen an average subscription of 1.72 tonnes across 64 series in the seven years and seven months since its introduction as an alternative to physical gold in 2015. Last month’s purchases at ₹5,926 per gramme, the highest issue price since the inception of SGBs, imply an increase of almost 10% from the December 2022 series, which had an issue price of ₹5,409 per gramme. SGB prices exclude the 3% goods and services tax (GST) on gold.

Against this, the stock market benchmark index Nifty has generated a 6% return in the year through June at 19,189.5 points. In 2022 also, gold had outperformed equities, becoming the top financial asset class with a return of 13% between an issue price of ₹4,791 per gramme in December 2021 to ₹5,409 in December 2022. The Nifty, in comparison, gave a return of just 4.3% last year through 18,105 points.

“Gold was the best-performing asset last year, and this year, too, has generated market-beating returns amid the persistence of high inflation globally and the Ukraine war,” said Shekhar Bhandari, the president of global transaction banking at Kotak Mahindra Bank.

Asked about the outlook for the metal, given that the Nifty has broken out of a 19-month range of 15,184.3-18,887.6, Bhandari said he expects the metal to generate at least 5% more from the last issue price of ₹5,926 per gramme by the end of 2023. That means gold, ex-GST of 3%, could rule at around ₹6,200 by 2023-end.

Financial planners see SGBs as an effective means of diversifying investor portfolios.

“Rather than following a tactical allocation approach, gold should be part of a long-term asset allocation to diversify one’s portfolio,” said Amol Joshi, the founder of PlanRupee Investment Services. “That’s because nobody can time any asset’s performance. Who would have thought gold would be the best-performing asset last year or that markets would rally 2.5 times from a low of 7,511 during the pandemic onset in March 2020 to the October 2021 high of 18,604 when people were confined to their homes?”

Joshi recommends 85% allocation to equity and debt and 15% to gold and overseas equities, with folios up to ₹25 lakh investing 10% in gold and 5% in overseas shares, and those with a folio of ₹1 crore plus allocating 10% to overseas shares and 5% to gold.

SGBs are a unique asset compared to gold or even exchange-traded funds (ETFs), he points out, which, apart from tax-free capital gains after eight years holding period, have an interest component of 2.5% per annum, payable semi-annually. The interest is on the issue price, which means if the gold price falls at redemption, the interest payout cushions the loss of capital. The interest amount is taxable under the Income Tax Act. Early redemption of SGBs is allowed after the fifth year from the issue date.

Individuals can invest up to a minimum of 1 gramme of gold bonds and up to a maximum of 4 kilogramme (kg) per fiscal year. Trusts notified by the government can buy 20 kg per fiscal through bank branches of nationalized banks, scheduled private and foreign banks, designated post offices, and stock markets through brokers.

Updated: 17 Jul 2023, 12:50 AM IST