Best Way to Invest in Gold: Physical Gold vs Digital Gold vs Sovereign Gold Bonds (SGB)

Investing in gold is often considered one of the safest investments and it is rightly so. Gold is less co-related to other asset classes such as stocks, bonds, real estate, or cryptocurrency. This means the price of gold is less affected by movements in other asset classes. This makes gold a very stable and safe asset to hold. Gold is therefore a good investment to diversify your portfolio and minimize the overall risk.

In India,  you can invest in gold primarily in 3 forms –

1. Physical gold
2. Digital gold
3. Sovereign Gold Bonds (SGB)

In this article, we will go through all these forms of gold investment. We will discuss the pros and cons of each of these categories so you can decide which is the right form of investment for you.

Physical Gold

Physical gold is anything that you can hold physically, like gold jewelry, gold coin, gold bar, etc. It provides the most direct exposure to gold as you hold it physically. Traditionally we have been holding gold in the physical form for many centuries. From a medium of trade to ornaments and jewelry, gold is known to hold its value over time, and we have been passing on physical gold for generations. However, there are certain limitations when it comes to holding gold in the physical form.

Limitations of physical gold

1. Large minimum investment: You can’t buy gold in small fractions, say for Rs 100 or Rs 200. You have to buy at least a gram which may cost around Rs 5000 – Rs 6000.
2. Safety issue: Physical gold can be stolen or lost. So, you need to take extra care to keep your gold in a safe and secure location.
3. Making charges: You will incur some sort of making charges while purchasing physical gold. making charges vary from 8% to 35% of the total gold rate. Also, while liquidating it, you will incur melting charges.
4. GST: Generally, 3% GST is levied on gold jewelry, coins, or bars.
5. No regular income: Gold does not generate any regular income by itself. So you won’t be getting any regular passive income after investing in gold. You can realize your returns only upon sale.
6. Low Liquidity: You can’t sell your gold any time you want. You need to go to some jewelry stores, they will do some purity tests, and you remain unsure of how much value they will offer. Additionally, you will incur some melting charges before you get the final amount.

To overcome these shortcomings of physical gold, digital gold was introduced. So, let’s try to understand what challenges they solve and whether they are worth your investment.

What is Digital Gold?

Digital gold is the digital form of physical gold that can be purchased online. While you keep the digital ownership of the purchased gold, the actual physical gold is stored in a secure vault by the seller on your behalf.

How does Digital Gold Work?

When you purchase digital gold through a digital channel, the seller stores an equivalent amount of 24K, pure gold in his secure vault. So, what you buy is the digital ownership of that gold, while the actual physical gold is stored by the seller on your behalf. Since the vault is insured, even If there is a theft or fire at the seller’s godown, your investment is safe. So, you don’t need to worry about the safety of your gold anymore. Moreover, one unit of physical gold can be split into multiple digital ownerships. That gives buyers the flexibility to purchase as low as 1 rs worth of digital gold. Platforms like SafeGold, Google Pay, Paytm, PhonePe, Groww, Jar, 5Paisa, Amazon Pay, etc offer digital gold on their platform.

Advantages of Digital Gold

1. Safety: Since the seller is responsible to store the physical gold, you don’t need to worry about theft or misplacing your gold. The seller keeps the physical gold in insured vaults, thereby keeping the value safe in case of unwanted events.
2. Affordable: Unlike physical gold, you can even purchase 1 rs worth of digital gold. The seller splits the physical gold into multiple digital ownership. So, unlike physical gold, you can start your investment with a lot less amount. This makes it affordable for a lot of people.
3. High liquidity: You can sell your digital gold anytime you want. You don’t need to go to a jewelry shop, wait for them to test, and pay for melting charges. Since you are selling your digital gold on the same platform that you used to buy it, they don’t need to do multiple tests to find out the quality of your gold. You can sell and realize your returns instantly in a few clicks.

So, we can see, Digital Gold solves three problems that we had with physical gold. However, there remain a few problems with the physical gold that the digital gold can not solve. What are those drawbacks?

Drawbacks of Digital Gold

1. GST: Similar to physical gold, when you purchase digital gold you have to pay 3% GST on your purchase.
2. No regular income: You don’t get any monthly or annual regular passive income from your digital gold investment. You can realize your returns only upon sale.

Now you may ask, is there any other investment instrument available that overcomes these two drawbacks of digital gold? The answer is yes. The Sovereign Gold Bond tackles these drawbacks and provides you with a source of regular income without incurring any GST while purchasing. That’s why it is my favorite instrument to invest in Gold. Let’s understand more about it.

What is Sovereign Gold Bond (SBG)?

Introduced in November 2015, Sovereign Gold Bond (SGB) is a RBI-mandated government securities issued against grams of gold. This allows individuals to safely invest in gold without the strain of keeping their physical assets secure. It is considered one of the safest investment instruments that provide capital appreciation and a regular flow of income every year. Investors pay the issue price in case and they are eligible to redeem it upon maturity. This is a long-term investment instrument.

Key Features of Sovereign Gold Bonds (SBGs)

• Investors receive a 2.5% per annum interest rate on their investment which is credited semi-annually to the investor’s account.
• The minimum investment required – Value of 1 gram of gold
• Maximum investment limit – Value of 4kg of gold
• Sovereign Gold Bond is issued for a period of 8 years with premature withdrawal available from the 5^th year onwards.
• Available in both Demat and paper form
• Tradable on NSE and BSE

To learn more about SBGs, you can refer to this article published by NSE.

Key Advantages of Sovereign Gold Bonds (SBGs)

1. Hassle-free: Ownership of gold without holding any physical gold. So, no risk of theft or misplacing your gold.
2. GST-free: Unlike physical gold and digital gold, You don’t need to pay any GST while purchasing SBGs.
3. No long-term capital gain tax: Upon completion of the maturity period of 8 years, investors do not require to pay any capital gain tax on their returns.
4. Regular income: Investors earn a 2.5% per annum interest rate on their investment which is credited semi-annually to the investor’s account. So, if you have invested 1 lakh rupees in an SBG, you can secure a 2500 regular income every year.
5. Flexible exit option: Even though the maturity period is 8 years, you can avail of the premature withdrawal option from the 5^th year. In that case, you can sell the bond at the current value of gold. However, Long-term capital gain tax will be applicable in such cases.
6. Tradable: SBG bonds are tradable in stock exchanges. All you need is a Demat account with a reputed broker like Zerodha or Upstox. You can find a list of SBGs available for trading. So, even if you want to exit before 5 years, you can easily trade the bond in these exchanges.

Physical Gold vs Digital Gold vs Sovereign Gold Bonds (SBG)