Digital Gold vs Gold ETF

Updated on 9 May, 2024

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In India, gold is a go-to investment for most, and every auspicious occasion is marked with the purchase of gold. However, it comes with a risk of security and additional costs and charges. In this new era, you can purchase gold digitally or through mutual funds and ETFs. This article will cover the differences between Digital Gold vs Gold ETF.

Digital Gold vs Gold ETF

The following are the differences between Digital Gold vs Gold ETF

Parameters	Digital Gold	Gold ETF
Meaning	Digital Gold is an alternative to physical gold where every unit of digital gold purchase is 99.9% 24K pure gold.	Gold ETFs invest in physical gold of 99.5% purity where fund houses source it from banks. They are approved by RBI.
Who offers	In India, only three companies offer digital gold, i.e., – Augmont Enterprises Private Limited- State-owned Metals and Minerals Trading Corporation of India (MMTC), Produits Artistiques Métaux Précieux, Switzerland (PAMP)- Digital Gold India Pvt. Ltd. with its SafeGold brand	Different AMCs in India offer Gold ETFs
Ease of purchase	This gold can be purchased online through authorised partners such as popular e-wallets and other platforms	ETFs are listed on the stock exchange and can be bought/sold through a demat account offering high liquidity
Minimum investment	The minimum investment amount is usually Rs.100	Minimum investment is 1 unit which equals to 1 gram of gold
Cost	Digital gold purchase transactions attract 3% GST. Also, additional charges for storage and insurance may apply but are not standardised. If physical gold delivery is chosen during redemption, separate charges apply	ETFs have an expense ratio which is transparent and subject to SEBI limits. Also, transaction costs apply depending on the brokerage account
Conversion	The investor can convert the digital gold to physical gold. Depending on the seller and partner, it can also be swapped for jewellery.	Investors cannot convert the amount into physical gold directly. However, they can use the proceeds to buy physical gold.
Trading	Digital gold is not traded, but the purchase and sales are at the prevailing gold prices.	ETFs can be traded at a premium or discount to market price because of the underlying NAV. Low trading volumes and tracking errors cause deviations in returns of ETF when compared to returns of physical gold.
Regulation	The digital gold has a lot of ambiguity about its regulation and does not fall under one regulatory body.	Gold ETFs fall under the regulation of SEBI and are well regulated.
Taxation*	Gains from gold investments held for less than three years are taxable per the investor’s income tax slab rates. For an investment withholding period of more than three years, the gains are taxable at 20% with indexation benefit.	Gains from gold investments held for less than three years are taxable as per the investor’s income tax slab rates. For an investment withholding period of more than three years, the gains are taxable at 20% with indexation benefit.

*Note: From April 1st 2023, capital gains from Gold ETFs will be taxable as per the investor’s income tax slab rate, irrespective of the holding period. Thus, Gold ETFs will no longer have the LTCG benefit.

Who Should Invest in Digital Gold?

Investors who want to invest in gold but cannot bear the high investment cost or storage costs can consider investing in digital gold. In other words, digital gold enables investors to invest small amounts as there is no restriction or minimum purchase value. Furthermore, investors need not worry about storing the gold, as the sellers keep it safe in their vaults.

Buying and selling digital gold is entirely online without any hassle of physically holding the asset. The platforms offer digital gold at real-time rates where investors do not have to worry about price differences. Therefore, investors who prefer to make small investments in gold at their convenience can invest in digital gold. Moreover, investors have the choice to either cash out their investment or redeem it as physical gold in the form of coins or bars.

Who Should Invest in a Gold ETF?

Gold ETFs are suitable for investors who wish to diversify their investment portfolio through another asset class. Also, investors who want exposure to gold and want to participate in the financial market. They are low-risk investments as for these ETFs gold of 99.5% purity backs them, they are low-risk investments. Hence, they are ideal for investors with low-risk tolerance levels.

Gold ETFs are similar to digital gold, which reduces the risk and costs of storing gold. Moreover, these funds are more tax-efficient than physical gold. Hence investors who want to invest in gold to earn a return and hedge their portfolio against equity can consider investing in Gold ETFs. Furthermore, Gold ETFs track the prices of gold in real-time subject to tracking errors. Therefore, investors who want to track their gold investments on a real-time basis can consider investing in Gold ETFs.

Gold ETFs to Invest

Digital Gold vs Gold ETF – Which is Better?

Both digital gold and gold ETF may look very similar. However, digital gold may not always be advantageous over gold ETF. Even though you need not worry about its purity and resale value, trading occurs at market prices. Also, you can invest in digital gold with an amount as low as Rs.100. The only difference is the physical delivery option by digital gold, while gold ETF does not have this option.

The physical delivery option may not always be helpful if you want to convert it into jewellery. Because not all jewellers accept gold coins or bars for making jewellery bought elsewhere. Also, they could levy additional conversion charges. On the other hand, you can redeem the amount with a gold ETF and buy jewellery with it.

Moreover, digital gold comes with its own set of challenges. Any regulatory authority does not regulate digital gold. Due to this, the risk associated with digital gold increases. At the same time, RBI and SEBI regulate gold ETFs or gold funds and have transparent structures. They can be a superior alternative to digital gold. Therefore, investors can choose to invest based on their future consumption purpose and understanding of risk while investing in gold.

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