Gold is synonymous with wealth. In investment portfolios, it’s considered a safe haven as prices move differently from equities and bonds. When there are inflation worries or a rise in volatility, investors rush to the yellow metal like a moth to a flame.
But how you invest in gold today matters as much as why you invest in it. We’re no longer restricted to buying gold as coins or jewellery. Much like most aspects of our lives, gold too, has gone digital. Now you can buy gold without actually buying it physically.
But which kind of gold offers better advantages? Let’s find out.
Why Gold is Essential for Your Portfolio
Gold does well when there’s uncertainty in the market. It has, historically, shown low correlation with equities, meaning when risk assets aren’t performing, there’s value in gold. Gold is also used as a hedge against currency depreciation, as it’s traded in dollars globally. So, when the rupee weakens against the dollar, Indian gold prices rise as it takes more rupees to buy the same dollar-priced gold.
Investing experts suggest allocating about 10-15% of your portfolio to gold. If it crosses that threshold, the general recommendation is to book profits and reallocate the funds. But the question is, how to get to that allocation percentage.
Physical Gold: Traditional and Tangible
Physical gold comes in the form of coins, jewellery, and bars. Indian households tend to own physical gold as a means of long-term financial security, driven by deep-rooted cultural obligations. It has its advantages.
Advantages of physical gold
The biggest advantage is that it’s tangible. You can touch it for reassurance and pass it down generations.
There’s cultural and emotional value as well, especially during weddings and festivals.
Disadvantages of physical gold
Physical gold does come with hidden costs.
In case of jewellery, you incur making charges anywhere between 5-15%, which may not be recoverable during resale.
Resale itself can be a hassle, with prices depending on the buyer and prevailing market conditions.
Then there’s the issue of storage. Keeping gold at home is risky, but with bank lockers, there are recurring charges.
Purity is another concern. You never really know just how pure the gold is.
Because of these extra costs, storage and purity concerns, and illiquidity, your actual returns are much lower.
Digital: A New Way to Invest
It is the 21st century, and while we may not have flying cars yet, we do have digital gold. These are financial products like Gold Exchange Traded Funds (ETFs) and Sovereign Gold Bonds (SGBs) that allow you to invest in gold without actually requiring physical possession.
Advantages of digital gold
Gold ETFs are funds that invest in physical gold and are traded on exchanges like the NSE and BSE, for example, the HDFC Gold ETF or SBI Gold ETF. Since they are traded like stocks, you can buy and sell these ETFs more easily (higher liquidity), with lower expense ratios compared to the costs involved in physical gold.
Sovereign Gold Bonds are issued by the RBI on behalf of the government. They are issued in a limited fashion, but offer a fixed interest rate. Because they are held in demat form, there are no storage costs involved. They also offer tax-free capital gains if held till maturity.
Digital gold platforms allow investors to buy gold in small amounts online, wherein the gold is stored by a custodian (vault and security companies).
Disadvantages of digital gold
It’s important to understand that while ETFs, SGBs, and digital gold are all “digital”, the latter is simply buying a piece of physical gold stored in a vault somewhere.
With digital gold, there are storage costs and redemption terms to consider.
Unlike ETFs and SGBs, digital gold is not regulated by SEBI. There’s the application of the Goods and Services Tax as well, making them more expensive than ETFs or SGBs.
ETF profits are taxed as capital gains and also come with expense ratios that eat into the returns. Plus , they do not offer any interest, unlike SGBs.
And SGBs have a lock-in period, limiting liquidity.
How Should Investors Choose?
It all depends on intent.
If the objective is to secure somebody else’s financial future in the way of gifts or tradition, then physical gold has a role to play. With jewellery, there’s an added functionality as well.
But if the idea is to diversify your portfolio, digital gold is far more efficient, with better returns overall. And among the digital gold formats, ETFs offer the best balance in terms of returns, cost, and liquidity.
The Bottom Line
It’s clear that physical gold satisfies traditional and emotional needs, while digital gold maximises efficiency and strategy. As a result, digital gold is quickly becoming the preferred mode of adding the yellow metal to one’s portfolio. It also helps that its much more accessible.
With a Dhan demat account, you can invest in gold ETFs just like you invest in shares. You can see a unified view of your investments, including gold, all on one platform. And you can rebalance your portfolio as and when the market moves.