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  • Writer's pictureSahastha

Digital Gold vs Physical Gold

Updated: Oct 4, 2023

Investment in gold can be made in various forms such as physical gold which include gold coins, gold biscuits, digital gold which include exchange-traded funds (ETFs), and Sovereign Gold Bonds (SGBs) etc. Having gold in an investment portfolio is essential as it helps to diversify the investment portfolio. Experts suggest that an investment portfolio should have at least 10% in the form of gold. Investment in the form of gold is a good strategy to offset the risk against inflation and currency fluctuations. Here we will discuss about physical gold vs digital gold in detailed manner Physical gold – it needs storage such as to keep the gold safe it is kept in the bank in locker rent and for this facility one has to pay charges. Whereas in digital gold no charges are required as it is held in electronic form. Wealth tax is applicable if the value of physical gold is more than INR 50 Lakhs. Pricing of physical gold vary from jewellery to jewellery. Making charges in physical gold is additional expense. In physical gold purity is always a big concern. Physical forms of gold are available in the standard form of a denomination like 10gm that requires huge investment.

Digital Gold – Digital gold like SGBs and gold ETFs are available in small quantities. Making small investments in regular basis to accumulate gold over a period of time. There is no risk of theft as digital gold will be in the holder’s Demat Account and it is cost-efficient. There are no extra charges like storage cost attached to it. Digital gold is priced as per international standards and are always transparent. There is no risk to purity. Sovereign Gold Bonds are issued by the Reserve Bank of India (RBI) on behalf of the government of India. Furthermore, they are a part of the market borrowing program. However, SGBs are denominated in grams of gold and the price of each gram is linked to the value of gold with purity, these are government securities that pay an interest of 2.5% per annum to the investors. By investing in Sovereign Gold Bonds, one need not worry about it being stolen, storage costs or even purity of gold. Also, the issue price of the bonds depends on the price of gold of 99% purity. Since they are in certificate format and stored in a demat account. Moreover, there are no additional storage costs. Hence investors who want to buy gold only for the purpose of investment and expect a regular source of income can consider investing in these bonds. Gold ETFs are mutual funds that are traded on the stock exchange. They are very liquid and the price depends on the demand and supply of gold. Gold ETFs do not offer any passive income in the form of interest. Investors who prefer liquidity in their investments can invest in Gold ETF. Which is suitable option for you? While purchasing a physical gold, the main drawback is that the resale value of jewellery and ornaments is comparatively lower than digital gold. Additionally, the purity of gold being bought can also be a big concern. Investors who want to invest for short-term keeping liquidity in focus, Gold ETF is better as it allows an investor to liquidate one’s money at any time. However, for the long-term investors, Sovereign Gold Bond is better as it gives 2.5% guaranteed returns along with tax exemption on maturity amount after is 8 years lock in period. For those investors whose major concern is about liquidity, ETF is a better option. SGB is good option, if the investor wants tax exemption on one’s maturity amount. SGB has lowest tracking error, lowest expense ratio, gives a yearly dividend 2.5% and is good for longer investment horizon. Somewhat buying gold through ETF has transaction costs and tracking error associated with it. Conclusion Both have an advantage in their own field but digital gold is comparatively better than physical gold. Gold ETFs and SGB bonds are more convenient, with no extra charges, etc. But there is a risk against digital gold also, during the financial crisis the physical gold will help you more in the liquidation process. Do proper research before investing and make a decision according to your requirements.

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