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Arbitrage with Sovereign Gold Bond (SGB) India 2024

As our readers are aware, we constantly search for novel arbitrage opportunities that enable individuals to earn relatively risk-free profits. Many of our clients and traders are acquainted with the USDT INR arbitrage opportunities within the cryptocurrency markets. Today we are going to talk about another such opportunity with Sovereign Gold Bond (SGB)

Table of Contents

What is a Sovereign Gold Bond (SGB)?

Sovereign Gold Bond (SGB) is a government-backed scheme launched by the Government of India to enable individuals to invest in gold in a digital and paperless manner. Under the scheme, individuals can buy bonds that are denominated in grams of gold, and the value of these bonds is linked to the prevailing market price of gold.

The minimum investment in the scheme is one gram of gold, and the maximum investment limit is 4 kilograms for individuals, 4 kilograms for Hindu Undivided Families (HUFs), and 20 kilograms for trusts and similar entities. The bonds have a maturity period of 8 years, but investors have the option to exit after the fifth year, and the redemption price will be based on the prevailing market price of gold.

SGBs offer several advantages over physical gold such as no storage cost, no risk of theft, no making charges, and regular interest income of 2.5% per annum. Additionally, SGBs can be used as collateral for loans, and the capital gains tax arising from the transfer of the bonds has been exempted.

What is the Arbitrage with Sovereign Gold Bond (SGB)?

You can purchase these Sovereign Gold Bonds (SGB) directly from the secondary market - stock exchange at a discount of more than 5%. And you can earn yields of approximately 3.5% per year as compared to 2.5% in the primary issue.
The market for SGBs exhibits low liquidity, which has resulted in the availability of many bonds at a discounted price. As the coupon rate is fixed, an arbitrage opportunity arises with yields usually ranging from 3.3% to 3.5%. This situation creates a scenario where the returns on different investment options in gold differ as follows:
  • Investment in physical gold generates returns through gold price appreciation minus the associated charges.
  • Investing in SGBs at the primary issuance stage offers returns through gold price appreciation in addition to a fixed annual interest rate of 2.5%.
  • Investing in SGBs through this arbitrage opportunity in the secondary market yields returns through gold price appreciation plus a potential yield of approximately 3.5%.
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Sovereign Gold Bonds are one of the best ways to invest in gold. Compared to physical gold, SGBs come with

  • Tax benefits (on capital gains)
  • 2.5% annual rate of return
  • No making charges unlike physical gold
  • There is zero risk of theft or impurity unlike physical gold

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Here are some key points that one should consider before buying Sovereign Gold Bond (SGB) from the secondary market:

  • The tax benefits on capital gains are the same for SGBs held until maturity, irrespective of whether they are bought from the primary or secondary market.
  • The purchase of SGBs from the secondary market is subject to certain limitations, such as the inability to buy them in large quantities.
  • The low liquidity of the SGB market may create difficulties when selling these bonds in the secondary market, and investors may need to hold them until maturity to avoid any negative impact on returns.

Instead of investing in the primary issue, purchase units from the exchange. Just type the scrip on your broker’s app or website, and you can purchase these units directly from the exchange just like a stock.


Question: Since the interest on SGB is on issue price. If you gonna buy the existing SGB (at discount), will the interest yield would be low w.r.t to newly issued SGB?

Answer: Yes interest amount will be low since face value of earlier SGBs is mostly lower compared to current SGB. However discount in secondary market more than compensates for lower interest - that's why YTM of earlier SGBs is coming around 3.5% while new SGB is at 2.5%

Question: Why is the face value and investment amount different?

Answer: Face value is the price of Gold at the time of issuance of the SGB series. Market price will move up and down basis Gold price movement.

Question: What happens at the end i.e. on Maturity ? Do we get the money back or we have to sell it in the secondary market?
Answer:  Funds automatically comes in the Demat linked Bank account.

Rather than investing in the primary issue, investors can purchase units of Sovereign Gold Bonds (SGBs) from the exchange. This can be done by typing the scrip on the broker's app or website, which allows the purchase of these units directly from the exchange, similar to buying a stock.