Investment options can come in different forms, such as stocks, bonds, bank FDs or even gold. Gold investment is not just about collecting physical gold like in the old days. Today, gold investment comes in different formats, such as Sovereign Gold Bond (SGB) , Digital Gold, etc. Each investment type offers unique features, benefits, and risks. While both SGB and digital gold are two good investment avenues, investors who are new to these concepts may often get confused about which one is safe to invest and which one offers better returns.
Sovereign Gold Bonds (SGBs) are denominated in grams and are RBI-issued government securities.
Listed here are some of the benefits offered by sovereign gold bond investments:
SGB is a good alternative for investors looking to buy gold for investment purposes. This investment ensures that the quality of gold is maintained and investors can secure themselves against related risks.
With SGB investment, investors can save on the cost of storing physical gold. Since this investment is in a digital format, it is maintained in an investor’s demat account.
Unlike physical gold, SGBs offer a 2.5% interest. The return on investment aspect makes them an attractive option as investors can fetch a passive income on gold, which gets credited to their linked bank account.
Any capital gains on SGBs at maturity are completely tax exempt. This makes them an attractive investment avenue, especially for long-term investors.
SGBs involve a risk of loss in case the market price of gold drops below the cost price. This is not specific only to SGBs and is applicable to gold as an investment. The central bank, however, assures investors that they will note incur losses as far as the quantity of gold allotted through SGBs is concerned.
Digital gold, as the name suggests, is a virtual mode of acquiring and investing in gold. It can easily be bought online.
Some of the benefits of investing in digital gold are:
Some of the factors to keep in mind while investing in digital gold are listed below:
The table below contains some of the main differentiating factors between SGB and digital gold that can help investors choose between these two gold investment formats:
| Digital Gold | Sovereign Gold Bond | |
| Trading | Not exchange traded and can be bought/sold 24/7 online. | These are exchange traded, hence, can be bought/sold only during market hours. |
| Lock-in period | No lock-in period | 5 Years |
| Storage | This investment involves buying/selling of actual gold stored in physical vaults. | There is no physical gold involved here and SGB only acts as a reference to gold as a denomination. |
| Cost | One-time GST of 3% | Demat account opening and transaction cost. |
| Affordability | More affordable since minimum investment is Re.1 | Not affordable by all since minimum investment is 1 gram, which is approximately Rs. 4,741. |
| Regulation | Not backed by any regulatory authority. | Sovereign guaranteed, issued by RBI. |
| Risk | Higher risk of loss | Lower risk of loss |
| Interest | No interest earning | SGBs offer a 2.5% annual interest – paid semi-annually. |
| Tax | Digital gold is treated the same as physical gold. Returns on these assets held for under 36 months are not taxable. Beyond 36 months, long-term capital gains tax at 20% on the whole amount is applied. | Any capital gains on SGBs at maturity are completely tax exempt. |
Digital gold is offered by a number of licensed fintech platforms online and can be a good alternative to investing large sums in gold coins and bars. Sovereign gold bonds allow investors to profit from gold price movements while continuing to earn interest rate, just like bank fixed deposits. Both these act as high-quality alternatives to purchasing actual physical gold. Therefore, an investment decision is entirely dependent on one’s preference and investment objective. Investors must, therefore, understand the basics of each of these options before making an investment decision.
Adding gold or gold-related assets to an investment portfolio can help to diversify risk and maintaining a balance in returns. Gold is known to offer good long-term returns. It is also used by investors as a hedging mechanism for a portfolio.
Digital gold, gold ETFs, sovereign gold bonds, gold mutual funds are some of the gold-related investment options available in India.
Physical gold often comes with the risk of purity and safety. Digital gold suffers from the drawback of lack of regulation. When it comes to gold ETFs and gold mutual funds, investors have to bear the risk of market volatilities. Sovereign gold bonds carry a marginal risk of default by the government.
Digital gold requires a minimum investment of only Re.1.
Physical gold, digital gold, gold ETFs, and gold mutual funds offer higher liquidity, as these can be bought and sold at any time. Sovereign gold bonds, however, have a lock-in period of 5 years and therefore these offer less liquidity.
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