295% return on SGB premature redemption date: Gold bond turns Rs 1 lakh investment into Rs 3.95 lakh

The Reserve Bank of India (RBI) has announced the premature redemption price for (SGB 2019-20 Series IV - Issue date September 17, 2019). According to a statement from the RBI, gold bond investors will have the option to redeem this SGB tranche prematurely from September 17, 2026.

The premature redemption of the SGB series is permitted after the fifth year from the date of the issue of such gold bonds on the date on which interest is payable, as per the statement from the RBI.

How is the SGB redemption price calculated?

The gold bond series’ redemption value is calculated based on the simple average closing price of the gold of 999 purity published by the India Bullion and Jewellers Association (IBJA) for the preceding three working days, the RBI statement further said.

What is the premature redemption price for SGB 2019-20 Series IV - Issue date September 17, 2019?

The premature redemption price due on September 17, 2026, has been fixed at Rs 15,173 per unit of the SGB, based on the simple average of the closing price of gold for the last three business days, i.e., September 16, September 15 and September 11, 2026.

The SGB 2019-20 Series IV was issued at Rs 3,840 per gram for online purchases. It will yield an absolute simple return of a little over 295% on the date of the premature redemption.

The absolute return is Rs 15,173 - Rs 3,840 = Rs 11,333. (without factoring in the interest). In percentage terms, it is Rs 11,333.÷ Rs 3,840 × 100 = 295.13%

A 295% absolute return means that an investment of Rs 1 lakh in this SGB series at the time of its launch would be worth a little over Rs 3.95 lakh today, excluding the interest earned on the principal amount.

Important frequently asked questions (FAQs) on SGBs as per the RBI website-

What is a Sovereign Gold Bond (SGB)? Who is the issuer?

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price, and the bonds are redeemed and paid back to investors on maturity. The gold bond is issued by the RBI on behalf of the government.

What is the rate of interest SGB investors get on their investment and how is the interest paid?

The bonds bear interest at the rate of 2.50% (fixed rate) per annum on the amount of the initial investment. However, SGBs issued in the Financial Year 2015-16 offered an interest rate of 2.75%.

Interest is credited semi-annually to the bank account of a gold bond investor, and the last interest is payable on the bond’s maturity along with the principal.