Options For Buying Digital Gold In India

In our previous article on investing in digital gold, we covered why and when does it make sense to invest in gold and the advantages digital gold offers over physical gold. Now, we would like to shed some light on the various options available for buying digital gold and the investment considerations under each option. Hope you will enjoy reading this article!

Digital Gold buying Options

1. Wallets and stockbrokers powered by metal trading companies

Mobile wallets like PayTM, PhonePe and stockbrokers like HDFC Securities, Motilal Oswal etc. provide an option for their customers to purchase digital gold through their platforms. However, these companies are only platform providers and not the actual sellers, the actual sale of gold happens through metal trading companies (Safe Gold, MMTC-PAMP). Once an investor makes a transaction on the platform company’s portal (mobile wallet/trade terminal etc), an equivalent amount of gold is purchased by the metal trader company and stored in secured wallets, which are 100% insured.

Investment Considerations:

Option to receive physical delivery of gold
Purity as high as 99.5% (Safe Gold) and ‘999.9+’, four nine plus (MMTC-PAMP)
Option to exchange digital gold for jewellery or coins
Can invest in an amount as low as 1 INR

Investment limit of 2 lacs on most platforms
Tenure Limit – You must either take delivery or sell gold after maturity
Not governed by a regulatory authority at this point

2. Gold ETFs on Stock Exchanges

Investing through gold ETF is very similar to investing / trading of shares on the stock exchanges. The price of ETF is directly linked to the value of gold bullion on the local and global commodity markets. The price of one unit of ETF is equivalent in value to one gram of gold.

Investment Considerations:

The flexibility, simplicity of stock investments
High liquidity, due to larger volume trade
Easy to track and eliminates storage requirement
No limits on value or tenure, you can hold as much you want for perpetuity
Secure, transparent and regulated by SEBI
Can invest from an amount equal to the value of 1 gram of gold

Must choose the ETF carefully, performance (tracking error) can vary based on the Asset Under Management (AUM) and the fund house
Short-term or long-term capital gains tax based on tenure (based on the slab if tenure is less than 3 years, 20% if it’s more)
Lack of investor discipline might prove costly, trading too often on exchange for short term gains without proper knowledge
Investors should do some primary research to choose a mutual fund with a lower expense ratio

3. Gold Funds through mutual fund houses

Gold mutual funds are very similar in comparison to Gold ETFs with regards to nature of operation and underlying price discovery. They offer additional benefits of the mutual fund world to investors like setting up systematic investment plans (SIPs), investing passively without DEMAT account and ease of traceability.

Investment Considerations:

Flexibility, simplicity and liquidity of mutual funds, DEMAT is not mandatory
Ability to purchase in SIP mode, similar to any mutual fund
Easy to track and eliminates storage requirement
No limits on value or tenure, you can hold as much you want for perpetuity
Secure, transparent and regulated by SEBI
Can invest as low as 500 INR, depending on the minimum value proposed by the fund

Must choose the mutual fund carefully, performance (tracking error) can vary based on the Asset Under Management (AUM) and the company managing the fund
Short-term or long-term capital gains tax based on tenure (based on the slab if tenure is less than 3 years, 20% if it’s more)
Investors should do some primary research to choose a mutual fund with a lower expense ratio

4. Sovereign Gold Bonds offered by RBI

Sovereign gold bonds (SGBs) are government securities denominated in grams of gold. They are issued by the Reserve Bank of India (RBI) on behalf of the government. The government pays an interest of 2.5% on the amount invested in SBGs which is an additional benefit, not present in any other option. Exemption of capital gains tax if held till maturity is also unique to SGBs. In the case of bond transfer, indexation benefits will also be provided to long terms capital gains.

SBG will have a total tenure of 8 years with the option to exit on 5th, 6th and 7th years, that need to be exercised at the time of interest payment. These bonds would also be traded on stock exchanges, but with less liquidity.

Investment Considerations:

Additional interest benefit of 2.5% on the value of the investment
Capital gains due on redemption are tax-free, only the interest (2.5%) is taxable.
Most secure and transparent option, issued directly by the Reserve Bank of India (RBI)
DEMAT is not mandatory, can be purchased through banks accounts also
Can invest from as low as 1 gram of gold

Available only at a specific time of the year, generally for a few months, decided by RBI
Should stay invested for long-term (5-8 years) to enjoy the full benefits
Less liquidity, if the investor wants to sell on exchange before the maturity date
Tenure limit of 8 years, investors must redeem at the end of 8 years

Conclusion

Investors must understand the various considerations like investment and tenure limits, taxation, traceability and price discovery under each available option and how they would affect their individual investment needs, before making a final decision.

Disclaimer: Gold investments are subjected to market risks. We are not recommending investing in gold or a specific option here, our endeavour here is to educate the retail investor on the options they have to invest in digital gold and the considerations for making an informed choice.