So, you have taken the right decision to invest in gold. And you have also crossed the stage of deciding in favour of buying gold in non-physical form.
The debate between buying physical gold and buying ETFs settled a long time ago. However, the emergence of digital gold (also called e-gold) has once again initiated a debate between these two ways of investing in gold in non-physical forms.
Understanding e-gold and ETF
Though ETFs had emerged as a prevalent and convenient form of gold investment, digital gold is emerging as a strong contender for being the no. 1 choice.
So, if you are among the people, who are a bit confused about whether to invest in digital gold or ETF, then read on. Before we compare the two investments, it would be better to get some idea about these investment tools.
Digital gold or e-gold is a gold investment plan, which allows even smaller investors to participate. Launched by the National Spot Exchange Limited (NSEL), this unique investment allows buying gold in an electronic form on NSE’s trading platform. The gold bought is reflected in your Demat account in T+2 days.
This means, if you buy or sell any gold units on a Monday, then they will be credited or debited in your Demat account on Wednesday. (provided Wednesday is not a holiday).
On the other hand, gold ETFs are like open-ended mutual funds that invest only in gold. With an assured gold purity of 99.5%, the ETFs are commonly referred to as ‘paper gold’. The investors can buy gold in ‘gold units’, where each gold unit is equal to 1 gram of gold.
These gold units are then listed and traded on major stock exchanges. The are then reflected in the investors’ Demat account. The investors can further track the performance and buy/sell these funds anytime within the trading period.
Comparing digital gold with ETF
So, finally, we have reached the stage that you are eager to know. What is a better investment idea between digital gold and ETF? The answer to this question is not so easy, with each investment option having its pros and cons. Still, we will try and make things easier for you to make a better and informed decision.
Return on Investment
Ultimately, that’s where it all boils down to. In 2012, the average return on gold ETFs was 11% compared to the 16% return provided by digital gold. So, when it comes to returns, digital gold has given better results compared to ETFs.
Price of gold and other charges
If we compare the two investment options on this parameter, digital gold becomes less expensive. The ETFs have several charges attached, like asset management fees, security service fees, etc. This makes the ETFs more costly as compared to digital gold.
Valuation of your investment
When it comes to valuing the NAV of your gold investment, it’s easy to predict the value of digital gold. This would be equal to the prevailing market price of gold. However, in ETF, to know the exact value of your investment, you have to track the NAV of that fund.
In the case of digital gold, the broker charges a brokerage of about 0.25% of the purchase rate. Whereas, in the case of ETFs, the brokerage is Rupee 1 per lakh.
Time of trading
The timing for ETFs is as per the timing of the stock exchanges, which is from 9:00 am to 3:30 pm on weekdays. On the other hand, one can trade digital gold between 10:00 am and 11:30 pm on weekdays. This gives the investors a longer window for trading.
Ease of converting to physical gold
Both digital gold and ETFs can be converted into physical gold. However, the difference lies in the minimum quantity. The minimum amount of digital gold that one can trade is only 8 grams. In the case of ETFs, if one wants to convert ETFs into physical gold, the minimum quantity required is 500 grams. Also, not all companies allow converting the ETFs into physical gold.
This is the only parameter where ETFs have the edge over digital gold. For tax purposes, digital gold is treated the same way as physical gold and hence attracts wealth tax. If sold before three years, the person has to pay tax as per their tax slab. Also, when it comes to taking the benefit of long-term capital gains, one has to hold on to digital gold for a minimum period of 3 years. After three years, the person has to pay tax at 20% (after indexation).
On the other hand, the ETFs are treated as financial assets and hence exempted from wealth tax. Also, in the case of ETFs, one year is considered as long term. So, ETFs get the benefit of long term capital gain after holding for one year. Any gain from gold ETFs (sold within a year) attracts tax as per the person’s tax slab. However, after one year, the person can benefit from long-term capital gains and pay tax at 20% (after indexation).
So, when choosing between digital gold and ETF, both have their advantages and limitations. Hence, as an investor, you need to see what’s more critical for you and then decide accordingly.
Q. 1: What are the two common ways of buying gold in non-physical form?
Ans: Digital gold (also called e-golf) or Gold Exchanged Traded Funds (ETFs)
Q. 2: What are ETFs?
Ans: ETFs or Gold Exchanged Traded Funds are like mutual funds that only invest the amount in gold.
Q. 3: Which organization has launched digital gold?
Ans: Digital gold has been launched by the National Spot Exchange Limited (NSEL),
Q. 4: What are the various charges attached with trading in ETFs?
Ans: ETFs have several charges attached, like asset management fees, security service fees, etc.