SGBs and RBI floating-rate bonds are not strictly comparable as the underlying asset class is different, tells Ashutosh Gupta
21-Jan-2021
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Which will be a better investment - Sovereign Gold Bonds (SGBs) or RBI Floating-Rate bonds for the same period?
- S Murali
Both of them are very different, with a distinct underlying asset class altogether. So I would say, they are not strictly comparable, even though the tenure of these two investments is somewhat similar. One is an eight-year scheme and the other has a tenure of seven years. What I would rather suggest is to be guided by the investment objective or the purpose for which you are making the investment. I will explain the purposes for which both of these can be useful and hopefully, that will help you decide which one to choose.
Talking about the SGBs first, we don't look very favourably towards gold as an investment. At best, it can be viewed as a hedge against equity during the market downturn. If you look historically, gold has done well pretty consistently during the times when the equity markets have fallen sharply. So from that perspective, certain investors like to add a certain allocation of gold to their portfolio in a steady state as a store of value or as a hedge against their equity investments. And for that kind of a need, I think SGBs can be one of the best alternatives for taking exposure to gold. They yield 2.5 per cent over and above the appreciation in the price of gold. And the appreciation in gold price is itself tax-free. So overall, it works out to be a good alternative for having allocation in gold.
Now coming to the RBI floating-rate bonds, they are a good option for your long-term fixed-income allocation. Currently, they are yielding a return of about 7.15 per cent, even though it is subject to resetting every six months. But considering the low interest-rate environment that we are currently in, it is a fairly decent return. It can also be a suitable investment for those who are looking for a regular payout. These bonds pay out the interest every six months. So from that perspective, it could be a viable option for a fixed-income investor.
Now based on this information, you can decide which one suits you.
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