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Digital Gold Vs Sovereign Gold Bond – Where should you invest ?

Written by - Marisha Bhatt

December 21, 2022 7 minutes

Investment options can come in different forms, such as stocks, bonds, bank FDs or even gold. Gold investment is not just about collecting physical gold like in the old days. Today, gold investment comes in different formats, such as Sovereign Gold Bond (SGB) , Digital Gold, etc. Each investment type offers unique features, benefits, and risks. While both SGB and digital gold are two good investment avenues, investors who are new to these concepts may often get confused about which one is safe to invest and which one offers better returns. 

What is a Sovereign Gold Bond? 

Sovereign Gold Bonds (SGBs) are denominated in grams and are RBI-issued government securities. 

  • These cannot act as a replacement for physical gold. 
  • Issued in one-gram gold quantities and multiples. 
  • The minimum investment is one gram and maximum subscription limit is:
    • 4 kilograms (KG) for individuals and Hindu Undivided Families
    • 20 kilograms for trusts and similar entities 
  • Can be bought directly or from agents associated with:
    • Licensed stock exchanges
    • Scheduled private or foreign banks
    • Post offices
    • Nationalised banks
    • Stock Holding Corporation of India Ltd. (SHCIL)
  • The issue price for the SGB Scheme 2021-22 is Rs. 4,791 per gram

What are the advantages of investing in SGBs?

Listed here are some of the benefits offered by sovereign gold bond investments:

Alternative to physical gold

SGB is a good alternative for investors looking to buy gold for investment purposes. This investment ensures that the quality of gold is maintained and investors can secure themselves against related risks.

Cost savings

With SGB investment, investors can save on the cost of storing physical gold. Since this investment is in a digital format, it is maintained in an investor’s demat account.

Return on investment

Unlike physical gold, SGBs offer a 2.5% interest. The return on investment aspect makes them an attractive option as investors can fetch a passive income on gold, which gets credited to their linked bank account.

Tax exemption

Any capital gains on SGBs at maturity are completely tax exempt. This makes them an attractive investment avenue, especially for long-term investors.

What is the risk associated with SGB investments?

SGBs involve a risk of loss in case the market price of gold drops below the cost price. This is not specific only to SGBs and is applicable to gold as an investment. The central bank, however, assures investors that they will note incur losses as far as the quantity of gold allotted through SGBs is concerned.

What is digital gold? 

Digital gold, as the name suggests, is a virtual mode of acquiring and investing in gold. It can easily be bought online. 

  • With digital gold, an investor can digitally store 24K gold without worrying about keeping it safe. The minimum purchase or sale price for the same is Re.1. 
  • It can be bought online, and the seller holds it in insured vaults on behalf of the buyer.
  • Investors can buy digital gold using a Demat account, among other options. 
  • It acts as a representation of genuine gold, but not the returns on gold. 
  • With digital gold, an investor owns a gold bar or a piece of gold.
  • There may not be any regulatory monitoring by RBI or SEBI. 

What are the advantages of investing in digital gold?

Some of the benefits of investing in digital gold are:

  • An investor can opt for physical delivery of the gold.
  • The investment amount can be as low as Re.1.
  • Digital Gold is genuine as the gold purity is 24K.
  • It is stored safely and 100% insured.
  • The investment can act as collateral for availing online loans.
  • It can be exchanged for physical jewellery, gold coins or bullion.

Things to note before investing in digital gold

Some of the factors to keep in mind while investing in digital gold are listed below:

  • Most digital gold platforms have a maximum limit of Rs. 2 lakhs for individual investment.
  • Since these transactions are not regulated by any regulating body, such as RBI or SEBI, investor interests may not be safeguarded.
  • Digital gold too attracts delivery and making charges just like physical gold.
  • Some companies may offer a limited storage period. After this, an investor must either choose to take physical delivery of the gold or sell the same.

Which one to invest in – Digital Gold Vs Sovereign Gold Bond

The table below contains some of the main differentiating factors between SGB and digital gold that can help investors choose between these two gold investment formats:

Digital GoldSovereign Gold Bond
TradingNot exchange traded and can be bought/sold 24/7 online. These are exchange traded, hence, can be bought/sold only during market hours.
Lock-in periodNo lock-in period 5 Years
StorageThis investment involves buying/selling of actual gold stored in physical vaults.There is no physical gold involved here and SGB only acts as a reference to gold as a denomination.
CostOne-time GST of 3%Demat account opening and transaction cost.
AffordabilityMore affordable since minimum investment is Re.1Not affordable by all since minimum investment is 1 gram, which is approximately Rs. 4,741.
RegulationNot backed by any regulatory authority.Sovereign guaranteed, issued by RBI.
RiskHigher risk of lossLower risk of loss
InterestNo interest earningSGBs offer a 2.5% annual interest – paid semi-annually.
TaxDigital gold is treated the same as physical gold. Returns on these assets held for under 36 months are not taxable. Beyond 36 months, long-term capital gains tax at 20% on the whole amount is applied.Any capital gains on SGBs at maturity are completely tax exempt. 

Conclusion

Digital gold is offered by a number of licensed fintech platforms online and can be a good alternative to investing large sums in gold coins and bars. Sovereign gold bonds allow investors to profit from gold price movements while continuing to earn interest rate, just like bank fixed deposits. Both these act as high-quality alternatives to purchasing actual physical gold. Therefore, an investment decision is entirely dependent on one’s preference and investment objective. Investors must, therefore, understand the basics of each of these options before making an investment decision.

FAQs

Why should you invest in gold?

Adding gold or gold-related assets to an investment portfolio can help to diversify risk and maintaining a balance in returns. Gold is known to offer good long-term returns. It is also used by investors as a hedging mechanism for a portfolio.

What are the different gold investment options available in India?

Digital gold, gold ETFs, sovereign gold bonds, gold mutual funds are some of the gold-related investment options available in India.

What are the risks of investing in gold?

Physical gold often comes with the risk of purity and safety. Digital gold suffers from the drawback of lack of regulation. When it comes to gold ETFs and gold mutual funds, investors have to bear the risk of market volatilities. Sovereign gold bonds carry a marginal risk of default by the government.

What is the minimum investment in digital gold?

Digital gold requires a minimum investment of only Re.1.

Which is the most liquid gold investment option?

Physical gold, digital gold, gold ETFs, and gold mutual funds offer higher liquidity, as these can be bought and sold at any time. Sovereign gold bonds, however, have a lock-in period of 5 years and therefore these offer less liquidity.

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