A Comprehensive Comparison of Digital Gold Investments: SGBs, Physical Gold, Security Measures, and Pros & Cons
Introduction
- Brief overview of gold as a traditional investment
Gold in India holds a significant value. Both financially, as well as culturally. Gold as an investment instrument has been able to generate consistently rising returns over the last couple of decades, this coupled with a solid demand in the secondary market, and many practical use cases means that gold has become a truly significant financial instrument.
- Rise of digital gold investments in the modern era
Like all things digital, gold investing has also become digital. To make gold investment convenient, and to modernize the investment method, new digital gold based financial instruments have come into existence. Example- digital gold, SGBs, etc.
- Purpose of the article: To compare SGBs, physical gold, and digital gold in terms of investment value, security, and usability with an aim to assist the investors in choosing the most suitable investment in gold instruments.
What Are the Main Types of Gold Investments?
- A. Physical Gold
- Definition and forms (jewelry, bars, coins)
Physical gold, as the name suggests, is tangible in nature. There are many forms in which physical gold can be purchased like gold ornaments, utensils, bullion like gold coins, bard, etc.
- Traditional investment method
Physical gold has been the preferred investment method for the longest time. Reason being that ever since the early days, the tangibility of the assets helped grasp the true value of the assets. Also, a lack of digital gold based investment instruments meant that the only form in which gold investment could be done is by investing in physical gold in the form of jewellery, coins, bars, and utensils.
- B. Sovereign Gold Bonds (SGBs)
- Issued by the RBI on behalf of the Government of India
Sovereign gold bonds are government issued securities that are denominated in the grams of gold and are one of the best gold investment options available in the market. These are alternatives to hold physical gold, allowing the investors who want to purchase gold related security solely for the purpose of investment to enjoy interest income as well as the fluctuation in the value of the gold.
- Paper/digital format
Sovereign gold bonds are in paper or digital format, i.e. the investor in the bonds would only get an acknowledgement and a proof of investment in the form of a paper or digital contract. I.e. there is no tangible gold that the investor gets to hold/see.
- Interest-bearing instrument
One of the biggest SGB investment benefits is the fact that, along with the rising intrinsic value, these financial instruments also offer interest income to the investor. The interest income is over and above the final sale or maturity value of the instrument. Hence, allowing the investor to maximize their returns.
- C. Digital Gold
- Gold purchased and stored via online platforms
The gold purchased in the form of digital gold is stored by the provider. How digital gold works is that the gold provider provides fractional ownership to the total underlying gold in proportion to the money invested.
- Backed by actual physical gold in secure vaults
One of the major advantages of digital gold is that the digital gold is backed by actual physical gold that is stored in secured vaults. The benefit of purchasing digital gold is that it saves the investor effort to securely store the gold, and also allows the investor to invest any amount they see fit. I.e. There is a minimal barrier to entry concerning the amount that needs to be invested. An investor can invest as low as INR 500 in digital gold, which is clearly not the case with physical gold. Hence, all things considered, digital gold is arguably the best way to invest in gold.
Investment Structure & Returns
- Purchase Method
- Physical gold can be purchased from gold smiths, online e-commerce platforms, etc. It is recommended to purchase gold only from a trusted seller, and do all necessary checks before making the purchase to avoid frauds.
- Sovereign gold bonds are offered by the government. These bonds are not always readily available. These securities are released through registered brokers. The investor can apply for investment in the sovereign gold bonds through these registered brokers, required that the investor has a DEMAT account with the brokers.
- Digital gold can be purchased from websites offering digital gold solutions to the investors. It is important to purchase digital gold from trusted sellers, as these instruments carry seller risk. Trusted online platforms like Indiagold can be used to start your investment journey in digital gold. So one can start investing in gold with modern solutions like digital gold.
- Returns
- Capital appreciation
Irrespective of the investment avenue, gold related investment instruments offer capital fluctuation in relation with the actual market price fluctuation as seen in the physical gold. Looking at the track record, gold has produced exceptionally good returns over a longer investment timeframe, so all physical gold, digital gold, and sovereign gold bonds can help make exceptional returns in the form of capital appreciation.
- Interest income (specific to SGBs)
This advantage is exclusive only to the sovereign gold bonds. SGBs along with the capital appreciation, also offers interest income to the investors. This allows the investors to enjoy a higher magnitude of total returns. SGB interest rates stand at 2.5% per annum on the initial investment sum.
- Impact of market fluctuations
Market fluctuation in the gold price has an impact on the value of the gold based financial instruments. Be it physical gold, sovereign gold bonds, or a digital gold security, these are not prone to the fluctuations in the gold price. An increasing gold price can help an investor make exponential returns, and vice versa.
Security & Regulatory Measures
- Regulatory Oversight
- SGBs: SGBs are RBI/government guaranteed instruments. These are issued at an issue price, and give the investor returns in the form of interest payment along with an increase in the value proportional to the price growth of gold. Since these securities are issued by the government, these are guaranteed by the government as well as the regulator and there is no chance of default.
- Physical gold: BIS hallmarking is done by the Bureau of Indian Standards, hallmarking is a process of marking the physical gold with a symbol which signifies the purity of the metal. It is a great way to identify the gold that you’re purchasing and ensure that you’re paying for the right purity.
- Digital gold: Platforms offer comfort to the investors. It is necessary to only invest in trusted and reputed platforms offering digital gold.
- Storage and Insurance
- Security risks of investing in physical gold storage : This is a major drawback of investing in physical gold. The investor has to ensure that the proper storage is in place to ensure safety of the gold, and more often than not, this also attracts additional cost.
- Insurance coverage (digital & physical) : One can purchase insurance to safeguard their investment in digital gold, however many issuers offer insurance by default along with purchase of the security. For physical gold this can be crucial as there is a higher risk with dependable storage.
Cost and Tax Implications
- Upfront and Ongoing Costs
- Making charges (physical)
When purchasing physical gold, especially in the form of utensils or jewellery, the jewellers charge a making charge. As the name suggests, this is a type of an additional cost over and above the value of the gold metal to create the gold in the form that is being sold.
- Brokerage/platform fees (digital)
In the context of investing in digital gold, certain platforms may charge brokerage or platform fees as a convenience charge to relay the service of providing the opportunity to invest digital gold to the investor.
- No cost beyond purchase (SGBs)
This is a great advantage of investing in sovereign gold bonds (SGB), apart from the cost related to the purchase consideration, the investor does not have to bear any additional cost.
- Taxation
Tax implications is something an investor should keep in mind while formulating their gold investment strategies, as it can have a detrimental effect on the total returns made by the investor.
- Capital gains tax: Capital gains tax is applicable on all securities where the investor has made a gain in terms of an increased market value. The gain is equivalent to the difference between the selling price and the original purchase price. Capital gains tax can be classified into two parts - Short term capital gains, and long term capital gains. If the security is purchased and sold by the investor within 1 year then the gains are classified as short term capital gains, and if the horizon exceeds 1 year, i.e. the investor makes gold investment for long-term, then it is classified as long term capital gains.
Gold is no exception. Investing in physical, digital gold, and SGBs also attract capital gains tax. However, if one holds the SGB till maturity, then capital gains tax is exempted.
- Indexation benefits (SGBs) : Investing in the SGB offers the investor indexation benefits. I.e. Long term capital gains can be indexed up to 20% in other words, gains up to 20% are adjusted to inflation. This helps in minimizing the tax liability.
Gold investment comparison and Pros and Cons of Each Investment Type
| Investment Type | Pros | Cons | | ----- | ----- | ----- | | Physical Gold | Physical gold as an asset is tangible, and universally accepted as it has a solid secondary market with high demand | Storage risk, making charges, theft risk | | SGBs | Government-backed, pays interest, tax benefits | Lock-in period, no physical ownership | | Digital Gold | Digital gold investment in India is convenient, secure storage, fractional ownership | Platform dependency, limited regulation |
