In India, gold is not just an investment, but an emotion. It is an inseparable part of their life and culture–a way to celebrate, feel proud and hedge against financial and political uncertainties.
However, all these investments are related to buying physical gold in the form of coins and jewellery. Physical gold investments can have problems such as theft, cost of storage, purity issues, making charges and more.
So, aren’t gold investments worth it?
Don’t worry! Digital gold investments are to rescue investors from the hassles of physical gold and offer stable returns that match the prevailing pure gold rates.
At present, there are three popular ways to invest in digital gold in India. These are digital gold wallets, Sovereign Gold Bonds (SGBs) and gold mutual funds.
1. Gold Funds
Let us look at each of these gold investment products in detail:
Gold investments are one of the popular options to invest in digital gold in India. Currently, there are three broad types of gold mutual fund investments available in India.
These are as follows:
A. Gold Mutual Funds
Just like equity mutual funds have 80% constituent focus on equity-based investments, gold mutual funds have 80% of their underlying assets in gold-based or gold-focussed investments. Gold mutual fund schemes invest in paper and physical gold investments. These mutual funds schemes might also invest in companies engaged in gold mining, polishing and gold extraction. Investors can invest in gold mutual funds through SIP or lump sum.
B. Gold Exchange-Traded Funds (Gold ETFs)
Exchange Traded funds or ETFs are passive mutual funds that track an index. These funds are unlike other mutual funds because of their special feature of higher liquidity. ETfs are more liquid because investors can trade them at exchanges just like stocks. They are passive funds that follow an index (here they follow the price of physical gold). These are commodity based ETFs that are traded similar to stocks.
Investors need a demat account to invest in these funds.
C. Gold Fund of Funds (FoFs)
Fund of Funds or FoFs are mutual funds that invest in other mutual fund schemes. These are passive mutual funds that track the composition and performance of other mutual fund schemes. There mutual funds can track the performance of domestic gold funds or international gold mutual funds and ETFs. Gold FoFs can even have a set of gold ETF, or gold mutual funds from a specific country or countries. These funds diversify gold mutual fund investments across global prices, representing a more diversified gold investment.
2. Digital Gold Wallets
Popular digital payment apps or UPI applications like PhonePe, Paytm and Google pay provide the feature of investing in digital gold wallets. There are investments that comprise 24-karat gold purity in the digital form, plus taxes. Here, you can invest a fixed amount in terms of SIP (Systematic Investment Plan) or buy units one time.
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This process of investing in digital gold is as simple as a mutual fund SIP. However, the investors have a privilege of investing as low as ₹10 daily, making it ideal for small daily savings. The Goods and Services Tax (GST) on these investments is 3% on every invested amount.
3. Sovereign Gold Bonds (SGBs)
The Reserve Bank of India (RBI) offers Sovereign Gold Bonds (SGBs) on behalf of the Government of India (GoI).
These bonds are a convenient way to invest in gold without the physical risks. Each bond represents a gram of gold and comes with a fixed interest rate of 2.5% per year. This means you get both the potential for gold price appreciation and a regular interest payment.
Features of SGBs
Here are some of the key features of SGBs:
1. Transparent
Each SGB represents a specific amount of gold (usually one gram). So, your investment value always aligns with the price of gold, making it transparent.
2. Interest Bearing
SGBs carry a fixed interest rate, typically paid semi-annually. This can provide a regular income stream in addition to any potential capital gains from gold price appreciation.
3. Government-Backed
SGBs are backed by the Government of India, ensuring safety and security for your investments.
4. Tax Benefits
Capital gains from the sale of SGBs held to maturity are generally exempt from capital gains tax. This can provide a potential tax advantage.
5. Dematerialised Gold Investment
SGBs are held in dematerialised (demat) form, eliminating the need for physical storage and reducing the risk of theft or loss.
What are the Benefits and Limitations of Investing in Digital Gold?
You might have purchased gold jewellery by visiting a jewellery store. While that might look easier, investing in digital gold too is hassle-free and has several embedded benefits.
Let us look at these benefits through the table below:
| Particulars | Physical Gold | Gold Mutual Funds | Sovereign Gold Bonds (SGBs) | Gold Wallets |
|---|---|---|---|---|
| Advantages | Tangible asset, potential for appreciation, can be used as collateral, cultural significance, potential for hedging against inflation | Diversification, professional management, liquidity, tax benefits (long-term capital gains), potential for outperformance | Government-backed, fixed interest rate, tax benefits (capital gains tax exemption), ease of purchase and sale, potential for appreciation | Convenience, security, low minimum investment, digital tracking, potential for price appreciation |
| Disadvantages | Storage costs, risk of theft, purity concerns, liquidity issues, potential for price volatility, high minimum investment | Investment fees, market fluctuations, potential for underperformance, potential for tracking errors | Limited liquidity compared to physical gold, potential for price volatility, potential for interest rate changes | Reliance on third-party providers, potential for technical issues, potential for security breaches |
| Suitable for which investor type | Investors seeking a tangible asset and potential for appreciation, those who value cultural significance, those with a long-term investment horizon | Investors seeking diversification, professional management, and potential for growth, those with a moderate to high risk tolerance | Investors seeking a safe and secure investment with government backing, those looking for tax benefits, those with a moderate risk tolerance | Investors seeking a convenient and digital way to invest in gold, those with small investment amounts, those who value convenience and security |
| Additional Considerations while Investing | Purity verification, storage options, insurance | Fund selection, expense ratios, tracking errors | Interest rate fluctuations, maturity period | Platform selection, security measures, transaction fees |
Benefits of Digital Gold
Here is a summary of the benefits of investing in digital gold in India:
1. Assurance of Purity
In digital gold, no matter what medium you choose, you always invest in the purest form i.e 24 karat or 99.9% purity. Therefore, investors can stay assured of purity while investing in digital or virtual forms of gold in India.
2. Lower Minimum Investment
Digital gold investments can be as low as ₹10 daily (digital gold wallets) or ₹500 monthly (gold mutual funds). These minimum investment rates are lower than that of buying physical gold.
3. Hassle-Free
Digital gold is always in the dematerialised form and therefore hassles like theft-protection and storage are absent. Investors do not have to worry about the making charges and the non-uniformity of gold prices across regions and stores while buying and selling (redeeming).
Wrapping Up
Digital gold investments can be better than physical gold investments in terms of purity, pricing, other costs and convenience. One can simply look for these investments from the comfort of their homes and get started with them.
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