Apply for the latest Sovereign Gold Bond issue or buy old tranches listed on the exchange? Here’s what you should do
The last tranche of the Sovereign Gold Bond (SGB) Scheme 2022-23 – Series IV ends today 10th March 2023. This is the last tranche of SGBs for this financial year, issued at Rs 5,611 per gram of gold. But do you know that these bonds can be bought even after their last date? This is because there are two ways to buy SGBs: primary issuance through the Reserve Bank of India (RBI) and in the secondary market on exchanges such as the NSE and BSE. The question is should we apply for the new issue or buy the listed old tranches?
The important things first. What sets SGB apart from other forms of digital gold is the fact that it also offers an interest rate of 2.50 percent per year, credited semi-annually. At maturity, the gold value is returned at current market prices along with interest income. For example; If the price of gold is 50,000 rupees per 10g and after 8 years it reaches 60,000 rupees, besides the profit of 10,000 rupees, you will also get interest of about 1,250 rupees per year, which is 10,000 rupees over the course of 8 months.
To date, 62 SGB issues have been traded on the stock exchanges at a discounted price. But how do you choose which edition to buy from the options available? “All 62 tranches issued so far are trading at a discount of between 1 and 5 percent to current gold prices due to liquidity problems and current yields, so buying the old tranche makes sense. Current yield = (Annual interest payable based on the issue price/market price of gold for that tranche). The higher the current yield, the better. Many old tranches are trading at yields in excess of 2.5 percent, which is higher than the 2.5 percent yield offered in the latest tranche,” said Lovaii Navlakhi, CEO of International Money Matters.
Navlakhi added: “Look at the YTMs of the listed bonds and choose the one with the highest YTM. There are some very interesting websites that provide live data on the YTMs of all the SGBs listed. You can sort them by the highest YTM and invest in that tranche. Liquidity availability is also mentioned for various tranches on these websites.”
When asked whether to buy the new tranche or an older tranche, Kirtan Shah, founder of Credence Wealth Advisors, tweeted on March 8: Choosing which to invest in out of the 62nd old and the new 63rd , you need to look at either -(a) available discount on the new issue (b) current yield on the old issue or (c) yield to maturity (YTM)
“It goes without saying that you should choose the bonds available at the highest discount, but there are 40 such bonds that are trading at a 5 percent discount and so look at the current yield or YTM to make the final decision to meet … If you see 2020-21, Series VI, Bond dated September 8, 2020, Issue Price – 5117, Interest Payable = 5117 * 2.5 percent = 128, 2.5 percent. Current market price = 5284… So if I buy this bond from the market at 5284, I still get the interest of 128 rupees, which is 2.5 percent, which even the new issue is paying,” Shah explained in his tweet.
The prices of SGBs in the secondary market, like any other security, are determined by the dynamics of supply and demand. However, there is not much liquidity for these instruments.
Is the purchase difficult due to low liquidity? “Liquidity is lower, so you have to wait or buy parts when there isn’t enough liquidity available. You can check the liquidity of different tranches through some websites. Also, if you’re buying through the secondary market, make sure you hold onto it until maturity, otherwise you’ll lose the benefit of buying at a discount if you’re trying to sell at a discount,” Navlakhi said.
Also Read: Save On Income Tax By Completing These 7 Finance Tasks Before March 31st