Sovereign Gold Bonds (SGBs) have become a favored choice among Indian investors looking to invest in gold. Issued by the Reserve Bank of India (RBI), these bonds come with the added advantage of a fixed interest rate and are considered safer compared to other gold investment products. However, with the current pause on new SGB issues, investors are turning to the secondary market, where older SGBs are trading at a premium of 5-10%.
The question is—should you buy Sovereign Gold Bonds at a premium? Here’s what you need to know before making that decision.
Why Are Sovereign Gold Bonds Trading at a Premium?
SGBs are traded on stock exchanges like the BSE and NSE. Each bond is backed by a gram of gold, and the price of these bonds is tied to the Indian Bullion and Jewelers Association (IBJA) gold rate of 999 purity. For instance, on October 23, 2024, the ‘SGBDEC25’ bond traded at ₹8,700, which was around 10% higher than the IBJA reference rate of ₹7,869.
The key reason for this premium is the suspension of new SGB issues, leading to a rise in demand for existing bonds in the secondary market. Investors are willing to pay more for these bonds as they see it as a stable gold investment with added interest benefits.
The Drawbacks of Buying at a Premium
While SGBs at a premium may seem attractive, there are some challenges. If you’re paying more than the current gold rate, you’re essentially betting on gold prices rising further in the future. But if the prices don’t increase as expected, you may face losses on your investment.
According to Nirav Karkera, head of research at Fisdom, buying SGBs at a premium could underperform if gold prices don’t rise significantly in the next few years. This is particularly risky for small investors who may not have the buffer to absorb potential losses.
Understanding Redemption and Market Risks
When the time comes to redeem your SGBs, the redemption value is based on the prevailing gold price. So, if the gold prices haven’t grown in line with the premium you paid in the secondary market, you could lose money. For example, if you bought an SGB at a 10% premium and the price of gold hasn’t risen significantly over the years, your returns will be lower than expected, even with the interest component.
Should You Buy at a Premium?
Investing in SGBs at a premium comes with certain risks, especially for those looking at short to medium-term returns. If gold prices rise, you could make a decent return, but if they don’t, you may end up with losses.
Experts suggest that small investors exercise caution when buying SGBs in the secondary market at a premium. Instead of jumping into the market, wait for opportunities when the bonds are available closer to the reference gold rate, or consider other options like gold ETFs, which can offer more flexibility.
Final Thoughts
While Sovereign Gold Bonds are an excellent investment for long-term wealth creation, buying them at a premium can be tricky. If you’re considering this move, ensure you understand the risks involved and are ready to hold the bonds for a longer period to maximize returns. Always consult with financial experts to make informed decisions.
