Gold has always been the first choice for Indians when it comes to investment. Our forefathers have always put emphasis on buying gold, be it for marriages in the family, or just to turn our savings into investments which can appreciate over time. When it comes to buying gold, first preference has always been buying jewellery or coins.
With rapid advancements in technology, investors can also consider digitising their investments in gold. This can be done by investing in digital gold However for a better investment choice one must always evaluate the different aspects of both physical and digital gold investments.
While physical gold has been traditionally bought and sold for centuries, not a lot is commonly known about digital gold as it is a relatively recent asset class. Let us understand the nature of digital gold and how it differs from investing in physical gold.
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Digital Gold
Digital gold is an asset class which can be bought online without owning the yellow metal physically. You can buy digital gold online through brokers or by using mobile e-wallets. You can also consider fintech apps to invest in digital gold, which also enables you to start with as little as Rs 10. The digital investment in gold is usually backed by physical gold, meaning you can redeem the amount in physical gold as well. Fintech platforms generally have a tie-up with gold traders. However, not every platform provides you with the option to redeem your investment in physical gold.
Gold ETFs (Exchange Traded Funds) and gold bonds are two ways to invest in digital gold. Gold ETFs are open-ended mutual funds which are linked to the changing price of gold in the market. Investors should note that investing in gold ETFs should be done with professional help as they are impacted by the fluctuations seen in the market.
Gold bonds, on the other hand, are relatively less risky than gold ETFs as these bonds are issued on behalf of the government by the Reserve Bank of India (RBI). The weight of gold is used to determine the denomination of these securities. The weight specified in the bond is equivalent to purchasing and holding that specific quantity of gold in physical form.
Differences Between Digital and Physical Gold
1. Liquidity
Digital gold is more liquid than physical gold as you can sell as little as 1 gram of digital gold instantly and effortlessly in case of emergencies. The process usually involves choosing the units you want to sell at the current market price, reviewing your transaction and placing the order. Once the order is fulfilled, you will be able to see the trade in your bank account.
On the other hand, the liquidity of physical gold depends on the form of gold. Gold bars and coins are relatively easier to sell, whereas liquidating a piece of jewellery might come with a deduction on making charges, wear and tear, etc. If the amount is large, the liquidation process might take longer and might require authentication.
2. Transparency
Digital golds are usually more transparent in nature, as most providers issue regular audits and reports on the gold holdings. Investors should make sure to run a background check on the provider of the digital gold.
Physical gold can be more opaque in nature as it can be difficult to verify its authenticity and purity. You can always check for a hallmark, an official mark stamped on the gold, which ensures that the gold is of pure quality. There have been cases where people were sold counterfeit gold bars due to a lack of verification.
3. Risks Involved
The biggest risk involved in investing in digital gold is the lack of a regulatory body. When you purchase digital gold from any fintech app, it is then kept in third-party storage and generally a trustee is appointed to check upon the quantity and the purity of the gold is maintained. However, there is no other regulator who supervises the trustee and his or her work.
In the case of gold ETFs, the Securities and Exchange Board of India (SEBI) works as the regulator, and for gold bonds, the regulations are formulated by the RBI.
Another risk factor is reliance on the credibility of the platform. If the platform collapses or faces a cyberattack, your investment can be exposed to huge risk.
For physical gold, the biggest risk lies in its storage. Storing a large amount of physical gold exposes you to the danger of it being stolen. Contrastingly, storing gold in a bank locker comes with a higher cost in your pocket. Also, banks are not liable for damages or loss of content kept in a locker due to calamity or natural disaster.
Investing in either form of gold depends on your preference, risk appetite and liquidation needs. You also need to keep in mind that you don't earn any type of interest on digital gold, other than Sovereign Gold Bonds. The taxation structure for gold is similar for both digital and physical gold. It is advised that you should consult a financial planner or investment expert before choosing the mode of investment to make a better choice.
