Investing in Digital Paper Gold: Does it shine as much as real gold?

One of the main positive impacts of the Covid-19 pandemic is the increased use of various digital platforms or channels for almost all activities of day to day life. Online transactions and digitalisation has become part of almost every house hold today, and one can say that demonetisation was one of the catalysts to the digitalisation push, especially in financial services sector.

Digitalisation empowers and makes investment processes easier across many financial instruments, be it equity shares, mutual funds, gold, insurance etc.

How can we as investors invest in Gold without much hassle today, especially since the onset of Covid 19 & lockdown? Let us discuss how digitalisation enables more investors to invest in Gold.

1. Purity of Physical Gold – is it really pure 24 carat?
2. Safe Custody of Physical Gold – where do I safely keep the shiny metal? Both of the above challenges can be well managed through digital investments in Gold.

Here are the 3 main Investment avenues for Digital Gold:

1. Gold ETs
2. Gold Funds
3. Sovereign Gold Bonds (SGBs)

Before we dip into gold investment avenues, let us understand the objective for investing in Gold.

Why do we Invest in Gold?

• Investments made in gold is an ancient way used by us to preserve and grow our wealth, especially during times of economic crisis and war.
• Gold has always been considered as an asset, currency and also commodity.
• Gold prices are volatile and move up and down, and are driven by supply and demand.
• Geo political events, economic collapse and war- like situations are high triggers for major upswings in gold price.
• As part of a financial plan, investments in gold are based on asset allocation.
• Investing in asset classes such as gold, equity, and real estate are done with the objective to provide inflation adjusted returns over a longer period of time.
• Investing in Gold is usually considered as a hedge against market and economic volatility and to provide stability in the overall portfolio.

Following are historical returns of Gold V/s Fixed Deposit & SENSEX.

1. What are Gold ETFs and how can I Invest in them?

• Gold ETFs track the price of Gold and hold the underlying asset as physical gold. Since it is traded in the secondary market, it is easy to transact and also highly liquid. The underlying physical gold is kept with the custodian and the custodian is responsible for the sourcing & safe keeping the underlying gold.
• Gold ETFs are available only in dematerialised form and a demat account is necessary to invest in Gold ETFs.
• Investing into Gold ETFs is simple, it can be done through the following process:
  a. Should have an active demat account.
  b. Funds to be transferred to broker account.
  c. Gold ETF can be bought from secondary market at our desired price.

Returns on Gold ETF will be marginally lower than physical gold due to tracking error, expenses and cash component in Gold ETFs. However, when the actual gold price moves up, the demand for gold ETFs in stock exchange will increase and this demand will marginally push up the price. Hence, in the short term, there may be a situation that Gold ETFs may provide marginally higher returns.

Below are details of the Performance an Returns of Gold vs Gold ETFS as on 31st July 2020:

2. What are Gold Funds and how can I invest in them?

• Gold Funds are mutual funds and they invest in Gold ETFs. For examples. HDFC Gold Fund will invest in HDFC Gold ETF. HDFC Gold ETF tracks the actual Gold price and it has the underlying asset of physical Gold.
• Gold Fund NAVs are calculated as per the closing price of Gold ETFs traded in stock exchanges.
• It is easier for the investors who do not have Demat accounts to invest in Gold funds.
• Investment in Gold funds has an additional advantage – investments can be staggered through SIP and STP route (Systematic transfer plan) . These methods help stagger investments and take advantage of volatility in Gold prices.
• Investment into Gold funds is a simple, it can be done through following process:
• Should have KYC registered with RTAs (CAMS, CVL KRA etc)
• Invest through existing mutual fund folios or fresh folio to be created with an initial investment.
• Fund transfer can be done through Net-banking, RTGS/NEFT.

Returns on Gold Funds will be lower than Physical gold due to tracking error of ETF, Expenses of ETF & fund and cash component in Gold ETFs.

Below are details of the Performance and Returns of Gold vs Gold Funds as on 31 July 2020:

3. What are Sovereign Gold Bonds (SGB's) and how can I invest in them?

• As per RBI, SGBs are government securities denominated in grams of gold.
• They are substitutes for holding physical gold.
• Investors have to pay the issue price in cash and the bonds will be redeemed on maturity. The bonds are issued by the RBI on behalf of the Government of India.
• As per this, SGBs do not have underlying asset as It is a Government Security (G-Sec) issued on behalf of Government of India by RBI and these bonds are denominated in the price of Gold.
• Investors will receive maturity proceeds according to the Gold price as on the maturity date.
• The objective of the Government to introduce SGBs was to reduce the Gold import bill and to replace direct investments into physical Gold.
• Investment into SGBs require Demat accounts and it can be done through following process:
• The SGBs can be held electronically through the Demat account.
• Demat accounts are required to get the credit of SGBs.
• All commercial banks are currently offering the facility to subscribe to SGB through their net-banking login.

• Since there is an additional 2.50% annual interest, returns from SGBs are higher than physical gold itself and also higher than Gold ETFs & Gold funds. This is major attraction towards investing into SGBs.