Digital Gold vs Gold ETF

February 2, 2022

There’s no denying how popular gold is in India. The case is also strong for digital gold vs gold ETFs to find a place in your portfolio as a hedge against inflation and to soften the blow of market crashes. So it is only to be expected that newer and more innovative methods to buy the yellow metal keep emerging.  You can read more about the different ways to invest in gold here.

Many of the alternatives to investing in physical gold have been born out of a need to address one or more of the shortcomings of investing in physical gold such as liquidity and the costs associated with safekeeping.  The latest to join the bandwagon is digital gold. Here we take a look at digital gold vs gold ETFs to see how they stack up.

Digital Gold vs Gold ETF

What is digital gold?

Digital gold is a relatively new avenue to invest in physical gold, trying to please both sides of the physical-vs-financial gold debate. It promises to do away with the hassles of holding physical gold – safekeeping, liquidity and ensuring of the purity of a purchase – offers the convenience of financial gold in liquidity, efficiency in tracking gold prices, and ease of investment, and finally meets the innate need to have physical gold.

In India, digital gold is sold by one of these three players – MMTC-PAMP, Augmont and Digital Gold India (SAFEGOLD). You buy digital gold online – either directly from these sellers by opening an account with them or through authorized platforms and popular e-wallets (Google Pay, Amazon and Paytm). Whether purchased from an authorized platform or an e-wallet, one of the three players named above will always be the seller behind the transaction. At redemption, you can choose to receive physical gold in the form of coins or sell it back to the seller.

For e.g., a customer making a purchase on the Tanishq Digital Gold platform, would be buying Safegold. The details of the purity of the gold being purchased is standardized and are available online, but, a customer cannot go and inspect the gold. Once the purchase has been made, the gold is kept safe in a vault by the seller on behalf of the customer. Different sellers could have different terms and conditions for the safekeeping of the gold and charges associated with the same and usually start charging after the lapse of a maximum storage period.

One of the most publicized advantages of digital gold is that the minimum purchase amount is very low which makes it widely accessible. On the Tanishq platform, the minimum amount is Rs. 100 and on others it could go as low as Re. 1.  The gold can also be purchased in one lot or accumulated much like an SIP. The customer can eventually take delivery of this digital gold in his / her account when needed or sell it back to the seller at prevailing rates. Taking delivery of the gold is usually subject to minimum quantity requirements and delivery charges. 

Purchases of digital gold attract 3% GST. The cost structure for digital gold is not standardized and there could also be additional charges for storage, trustee, insurance etc. The flip side to the positives is a lack of regulations – as of now, digital gold is not regulated by SEBI. In September last year, it banned stock brokers from selling digital gold to investors.

What are gold ETFs?

Another mode of investing in gold without the hassle of physical safekeeping, that has been gaining in popularity are Gold ETFs. Offered by AMCs, these are passively managed investment instruments that invest in gold and closely track the domestic price of physical gold. One unit of the gold ETF represents one gram of 99.5% pure gold and this is also the minimum purchase amount.

Gold ETFs are traded on the stock exchange like shares and can be freely bought and sold, making them extremely liquid. Of course, this also means that one needs a demat account to buy and sell gold ETFs and transactions attract brokerage. An additional layer of cost that gold ETFs are subject to is the fund management fees, but this is very low.

When you want to liquidate, you simply sell your gold ETFs on the exchange and the amount is credited to you. The option of taking delivery of physical gold is not available. AMCs only permit redemption in the form of physical gold if one holds an equivalent of 1 kilo (or a multiple of 1 kilo) of gold in ETFs, and only if you approach the AMC directly which is usually reserved for large investors.

Gold ETFs offer the possibility of timing the market, realizing gold price moves efficiently and accumulating via SIPs if desired. Here is a list of the gold ETFs traded on the NSE.  For a detailed look at ETFs in India, metrics to use and how to use them in your portfolio, take a look at our article ‘Indian ETF options and how to choose them’.

Digital Gold vs Gold ETF – a comparison

Digital gold is fast-becoming a popular route to buy the metal, with investors finding the option to get physical gold at the end an especial draw. So here’s a digital gold vs gold ETF comparison.

So, who wins the battle?

In the digital gold vs gold ETF debate, it may seem that both are neck-to-neck. However, know that digital gold does not really offer any meaningful advantages over investing via gold ETFs. The only differentiator is the physical delivery option in digital gold vs gold ETF which does not offer this option.

But physical delivery may not always be useful if you want to convert this into jewellery – jewellers don’t always accept gold coins bought elsewhere and could levy additional charges for conversion. With gold ETFs, you can simply redeem the amount you want and buy the desired jewellery with it.

What really tilts the scales in favour of gold ETFs in digital gold vs gold ETF battle is the regulatory aspect. Gold ETFs are very well regulated by SEBI and have transparent structures. Digital gold is currently in a regulatory grey area. Due to this, the associated risk goes up considerably and it would be best to steer clear of digital gold. So if it were digital gold vs. gold ETFs, for now it would have to be gold ETFs.  For gold ETF recommendations, visit Prime ETFs.

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