Apply for the latest Sovereign Gold Bond issue or buy old tranches listed on the exchange? Here's what you should do

The latest tranche of Sovereign Gold Bond (SGB) Scheme 2022-23 - Series IV will close today, March 10, 2023. This is the last tranche of SGBs for this fiscal, which was 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 of buying SGBs: primary issuance by the Reserve Bank of India (RBI) and in the secondary market on stock exchanges such as the NSE and BSE. The question arises should we apply for the new issue or buy the old tranches listed on the exchange?

First things first. What sets SGB apart from other modes of digital gold is the fact that it also offers an interest rate of 2.50 per cent per annum, which is credited semi-annually. At the time of maturity, the gold value at current market prices is returned along with the interest income. For example; if the gold price is Rs 50,000 per 10 gms and after 8 years if it reaches Rs 60,000 then apart from the gain of Rs 10,000, you will also get an interest of around Rs 1,250 every year amounting to Rs 10,000 over the course of 8 months.

So far 62 SGB issues are trading on the exchanges at a discounted rate. But, how to choose which issue to buy out of the options available? “All the 62 tranches issued so far are trading at a discount of anywhere between 1 to 5 per cent vs the current gold prices because of the liquidity issues & current yields, hence buying the old tranche makes sense. Current yield = (Annual interest payable based on issue price/Market price of gold for that tranche). So higher the current yield, the better. Many old tranches are trading at a yield higher than 2.5 per cent, which is greater than 2.5% yield offered in the latest tranche,” said Lovaii Navlakhi, CEO of International Money Matters,

Navlakhi added, “Look at the YTM's of the listed bonds, select the one with the highest YTM. There are some very interesting websites which give live data of the YTMs of all the listed SGBs. You can sort them by the highest YTM and invest in that tranche. Liquidity availability is also mentioned for different tranches on these websites.” 

On the question should you buy the new tranche or an older tranche Kirtan Shah, founder of Credence Wealth Advisors, tweeted on March 8: While selecting which one should you invest in out of the 62 old & the new 63rd one, you have to look at either -(a) Discount available to the new issue (b) Current Yield of the old issue or (c) Yield to maturity (YTM)   

“It’s a no-brainer that the bonds available at the highest discount is the one you should choose but there are such 40 bonds trading at 5 per cent discount & hence you look at the current yield or YTM to make the final decision… If you look at 2020-21, Series VI, September 8, 2020 Bond, Issue Price - 5117, Interest Payable = 5117 * 2.5 per cent = 128, 2.5 per cent. Current Market Price = 5284….So if I buy this bond from the market at 5284, I will still receive the interest of Rs 128 which is 2.5 per cent which even the new issue pays,” explained Shah in his tweet. 

Prices of SGBs in the secondary market are determined by the dynamic of demand and supply, just like in any other security. However, there is not too much liquidity present for these instruments.

Is buying difficult due to low liquidity? “Liquidity is less, so you will need to wait or buy into parts if enough liquidity is not available. You can check the liquidity of different tranches through a few websites. Also, if you are buying through the secondary market, make sure you hold on to them till maturity, otherwise you’ll lose the benefit of buying at a discounted price when you try to sell at discounted price,” said Navlakhi.

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