Digital gold investment: A new era for investors

Modernisation is a way of evolution, and it penetrates every field. Gold is one field where we have recently seen many technology-based options coming up to serve our investment needs. The younger generation prefers accessibility, and gold in the digital format provides it along with the traditional value of gold investment still intact. Thus, digital gold’s importance as an in-investment product is growing with the increasing awareness about products like SGBs and Gold ETFs.

Let’s understand a few of these options and their benefits: 

Sovereign bonds   

SGBs, or Sovereign Gold Bonds, are bonds the Government of India issues through the RBI. They have gold as an underlying and are issued in multiples of 1 gm, i.e., 1 gm = 1 unit. RBI issues a new series of product regularly, giving the masses a route to invest in the product. SGBs are also traded on the stock exchange, making them an easy tradable investment. SGBs provide interest on the face value and the gain from fluctuations in the commodity price. They have multiple other benefits, such as: saving the indirect tax cost, which would otherwise be charged for the physical product, saving on the making charges cost and ensuring the purity of the gold investment.  

• Read: How sovereign gold bonds outshine other asset classes

Exchange-traded funds  

Gold Exchange-traded funds are like any other ETF except that the underlying is gold. This option provides investors with the benefit of investing in gold at a price as low as  ₹50. This small quantum ensures that even retail investors can diversify their portfolios using gold and enjoy the protection of the hedge against inflation.  

• Editorial: Bonding with gold

• Read: Inflow into gold ETFs climbs over 4-fold to ₹6,900 crore

Electronic receipts

The electronic gold receipt is a fairly new concept. It provides the unique benefit of converting physical gold to the digital format and saving on the safe deposit costs while keeping the gold’s price appreciation intact. This allows investors to increase their returns by saving on the cost front. It also makes the products more tradable. Gold ETFs can be easily traded on the stock exchange, providing investors with a convenient transactional experience. 

Why is digital gold investment considered a stable option when we have multiple asset classes?

Digital gold products provide many benefits in addition to the traditional gold price increment and thus have attracted much more attention. We should also consider that this addition makes it stand out against other investment options. Fixed deposits come with a fixed interest rate, which beats inflation these days. The real estate segment isn’t providing the kind of returns it did a decade ago because of the lack of demand due to inflation.

• Read: Electronic gold receipts are now ‘securities’, says Finance Ministry

Given the geopolitical and economic conditions., the equity market has given almost no returns over the past year. With this uncertainty in mind, gold is the asset class people shift to since it is considered a haven. Since physical gold has limitations tied to buying and selling, additional costs in the form of making charges and GST, the people are shifting to digital gold as a better alternative.

Tax is another important aspect to consider. SGBs come with a benefit wherein if the units are held to maturity, then no tax is applicable. Hence if you plan to invest for a longer term, SGBs can be purchased and held to maturity, further increasing their return.

Here are the things to consider before choosing a digital product over the physical one:

Serves only the investment purpose

Physical gold ornaments and jewellery are purchased with the dual purpose of ornamental usage and investment. The ornamental use is something that the digital format of gold cannot cater to, and hence it is important to note that one should only invest in the digital form of gold when the motive is for investment purposes.  

Liquidity

Since digital products are new to the market, purchasing large quantities of them will significantly hamper the liquidity needs when you sell. This will lower down the price based on demand and supply.  

Taxation

While SGBs have tax benefits when sold on maturity, other investment options stand at par with physical gold on the tax front. Thus, estimating the holding period and deciding on the options is advisable. [Text Wrapping Break][Text Wrapping Break]To conclude, one should understand the products and their own risk and return needs before looking for the best fit for the combination of the two. Happy investing! 

Mahendra Luniya

The author is digital gold expert, Vighnaharta Gold

COMMENT NOW