Gold Investment Options After SGB Discontinuation: What Investors Should Consider

The Indian government has discontinued the Sovereign Gold Bond (SGB) scheme due to high borrowing costs and minimal impact on reducing gold imports. Investors can still trade existing SGBs on stock exchanges or explore alternatives like Gold ETFs and Gold Mutual Funds. While SGBs benefited individuals, Economic Affairs Secretary Ajay Seth stated they did not provide significant economic advantages.

CONTENTS:

• Gold Investment Options After the Discontinuation of SGBs
• Why the Modi Government Discontinued the Sovereign Gold Bond (SGB) Scheme?
• Sovereign Gold Bonds Benefited Individuals but Not the Economy, Says DEA Secretary Ajay Seth

Gold Investment Options After SGB Discontinuation: What Investors Should Consider

Gold Investment Options After the Discontinuation of SGBs

Gold Investment Options After SGB Discontinuation With the government discontinuing the Sovereign Gold Bond (SGB) scheme in Budget 2025 due to high borrowing costs, investors must explore alternative gold investment options. The surge in gold prices—recently reaching ₹84,900 per 10 grams in India and exceeding $2,800 per ounce globally—has reinforced gold’s status as a safe-haven asset.

Investment Alternatives to SGBs

1. Listed SGBs

Although new issuances have ceased, previously issued SGBs remain tradable on stock exchanges. Since 2015, the Reserve Bank of India (RBI) has issued 67 tranches, totaling 14.7 crore units. These bonds, available in demat form, provide an opportunity for investors to purchase them via NSE and BSE. However, they tend to have low trading volumes, potentially limiting liquidity. Additionally, SGBs mature in eight years, with an early redemption option after the fifth year through RBI’s buyback facility.

2. Gold Exchange-Traded Funds (ETFs)

Gold ETFs track domestic gold prices by investing in physical gold. Each ETF unit represents one gram of gold and is backed by high-purity bullion. Being exchange-listed, they offer liquidity and relatively lower costs compared to physical gold investments. However, ETF investments require a demat account and are subject to brokerage fees and market volatility.

3. Gold Mutual Funds (MFs)

Gold mutual funds invest in gold ETFs and are actively managed by fund managers. Unlike ETFs, they do not require a demat account, making them accessible to more investors. These funds often have higher expense ratios (1-2%) and carry the risk of underperformance relative to gold prices. Despite this, they have delivered strong returns—29.45% over the past year, according to Value Research.

Which Investment Option is Best?

Experts suggest that investors should continue holding their existing SGBs, as they remain one of the most attractive non-physical gold investment options. For new investments, gold ETFs and mutual funds offer viable alternatives, each with distinct benefits and costs.

With rising global uncertainty and sustained demand for gold as a safe-haven asset, investors should carefully assess their risk appetite and investment goals before choosing among these options.

Why the Modi Government Discontinued the Sovereign Gold Bond (SGB) Scheme?

Gold Investment Options After SGB Discontinuation Finance Minister Nirmala Sitharaman confirmed the discontinuation of the Sovereign Gold Bond (SGB) scheme during a post-budget briefing on February 1, 2025. Originally introduced in 2015 to curb physical gold imports, the scheme saw its final issuance in February 2023. The Reserve Bank of India (RBI) facilitated these bonds, allowing investors to hold gold in paper or digital form as an alternative to physical gold.

Reason for Discontinuation

The primary reason behind discontinuing SGBs is the high borrowing cost associated with the scheme. Economic Affairs Secretary Ajay Seth explained that such borrowing decisions are made based on the government’s market financing needs. He noted that over time, SGBs had become a relatively expensive borrowing tool, prompting the government to reconsider its support for this asset class.

Although the FY25 Budget allocated ₹18,500 crore for SGBs, no new tranches have been issued in the current fiscal year. The last issuance in February 2023 amounted to ₹8,008 crore, bringing the total issuance under the scheme to ₹45,243 crore as of FY23. As of March 2023, outstanding SGBs stood at ₹4.5 lakh crore.

Overview of the SGB Scheme

Launched in 2015, SGBs were introduced as a government-backed alternative to physical gold, offering investors the option to hold gold in a paper or digital format. The RBI issued these bonds on behalf of the government, making them a reliable investment option.

Investors could acquire SGBs either through the primary market (during fresh issuances) or the secondary market (stock exchanges). These bonds have a maturity period of eight years, with an early redemption option available after five years on interest payment dates. The RBI also notifies investors one month before bond maturity.

With the discontinuation of new issuances, investors looking to invest in gold will have to explore other alternatives, such as purchasing SGBs from the secondary market, investing in gold ETFs, or opting for gold mutual funds.

Sovereign Gold Bonds Benefited Individuals but Not the Economy, Says DEA Secretary Ajay Seth

Gold Investment Options After SGB Discontinuation Economic Affairs Secretary Ajay Seth stated in an interview with BusinessLine that the Sovereign Gold Bond (SGB) scheme has not provided any significant benefits to the government or the overall economy. However, he assured that all existing commitments to gold bond holders, including redemption and tax treatment, will be honored.

SGBs and Economic Impact

Gold Investment Options After SGB Discontinuation Seth explained that while the scheme has been beneficial for individuals with substantial savings seeking diversification, it has not yielded meaningful advantages for the Indian economy. The primary goal of the SGB scheme, launched in 2015, was to curb gold imports and reduce pressure on foreign exchange reserves. However, the reduction in imports has been minimal.

India imports approximately 800 tonnes of gold annually, and for the scheme to be effective, imports needed to decrease by 40-50 tonnes. However, the actual reduction has only been around 5-10 tonnes, which does not justify the continuation of the scheme from an economic standpoint. Additionally, the cost of issuing SGBs has been significantly high. While the government can typically borrow at 7%, the effective cost of gold bonds stands between 12-15%, making them one of the most expensive borrowing instruments.

Due to these factors, no new tranches of SGBs have been issued in the current fiscal year, and the government has opted not to continue the scheme.

Debt-to-GDP and Fiscal Management

Seth also discussed the broader fiscal strategy, emphasizing the need to reduce India’s debt-to-GDP ratio, which currently stands at 57%. The aim is to bring it down over time to enhance the government’s financial flexibility, ensuring more resources are available for spending on key sectors rather than interest payments. Fiscal consolidation is being pursued to create long-term financial stability and maintain economic resilience in case of future crises.

Stock Market and Currency Fluctuations

Gold Investment Options After SGB Discontinuation Regarding recent stock market reactions and the rupee touching an all-time low, Seth attributed the currency’s depreciation primarily to the strengthening of the U.S. dollar rather than inherent weakness in the Indian economy. He noted that global capital flows and macroeconomic conditions play a significant role in market movements, and isolated factors should not be overanalyzed.

In conclusion, while the SGB scheme has served as a valuable investment tool for individuals, it has not delivered expected economic benefits. Given its high borrowing cost and limited impact on reducing gold imports, the government has decided to discontinue new issuances while ensuring that existing investors receive their due returns.