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How to Invest in Digital Gold

Indians love to invest in gold.

We do it regularly, especially of religious occasions. India is the second largest importer of gold after China and accounts for about 25% of annual global supply.

Historically, there was only one way to buy gold and that was in the physical form. Today, Indian have the digital option too.

Buying gold digitally, removes the big hurdles of buying gold in physical form. Purity is usually guaranteed in the digital form. The price information is completely transparent. Storage and risk of theft are non-issues. Ditto for making charges.

In the case of digital gold, the returns you get on investment is known 24/7 as the spot price is your selling price. There are processing charges but these are reasonable.

Digital gold also offers the advantage of converting the digital asset into cash and then buying jewellery without any hassles.

Finally, you can invest much smaller amounts over a period of time in digital gold. This is very helpful for those who want to accumulate gold over the long term.

You can invest in the following ways.

Sovereign gold bonds (SGB): The SGBs are not gold investments per se. They are government securities that are denominated in grams of gold.

The value of the SGB is pegged to the spot gold price. The bonds have a maturity of 8 years. The minimum and maximum investments are 1 gm and 4 kg. The purity is of the 999 variety. Online investors receive a small Rs 50 discount per bond.

SGBs are popular because unlike gold itself, the SGB pays interest. It offers 2.5% p.a. TDS is not deducted on the interest. At maturity, you receive an amount equal to the gold's value on that date. There is no tax on redemption.

Gold ETFs: Unlike SGBs, ETFs offered by mutual funds are gold investments which are backed by physical gold. The physical gold is stored in vaults of the custodian of the ETF.

The value of each unit of a gold ETF is decided by the spot price of the gold and how much gold is denominated by each unit.

However ETFs do not exactly mirror the movement of the gold price. There is a tracking error involved when buying and selling gold ETFs due to the chares of running the ETF as well as the level of cash held by the ETF to meet redemptions and make investments.

You need a demat account to buy ETFs. The tax treatment is similar to debt funds.

Gold funds/gold saving funds: These are gold mutual funds. They are useful for people who don't have a demat account. These funds invest in gold ETFs.

Just like any other mutual fund, the net asset value (NAV) is declared at the end of the trading day. These funds also offer the SIP option which makes then convenient. The tax treatment is similar to gold ETFs.

To know more about gold, check out our article on how to invest in gold here: How to Invest in Gold?


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