What are Gold Exchange Traded funds (ETF)? About Sovereign Gold Bonds (SGBs) digital gold /

Why in news? Gold has long been a preferred choice for parking wealth in India, long before stocks, mutual funds and other financial instruments became part of the broader mix of investment options.

The metal is seen as a safe haven asset, providing a hedge against inflation or any kind of financial uncertainties. Apart from physically buying gold (like gold jewelry, coins, etc.), one can also invest in the metal using instruments like Sovereign Gold Bonds (SGBs), digital gold, and gold exchange traded funds (ETF).

What are Gold Exchange Traded Funds (ETFs)?

They  are a type of investment vehicle that allows you to invest in gold indirectly. Here’s a breakdown of what they are and how they work:

Function:

• Gold ETFs track the price of physical gold. By investing in a Gold ETF, you’re essentially buying units that represent a specific amount of gold bullion (usually 1 gram per unit).

Benefits:

• Convenience and Transparency: Unlike physical gold, which requires secure storage and can be inconvenient to buy and sell, Gold ETFs trade on stock exchanges like regular stocks. This makes them a more accessible and transparent way to invest in gold.
• Lower Costs: Compared to physical gold, Gold ETFs typically have lower investment costs. You don’t need to pay for storage, insurance, or security associated with physical gold.
• Diversification: Adding Gold ETFs to your portfolio can be a good way to diversify your investments. Gold is often seen as a hedge against inflation and market volatility.

Structure:

• Underlying Asset: The value of a Gold ETF unit is directly linked to the price of the physical gold it represents.
• Management: Gold ETFs are passively managed, meaning they aim to track the gold price instead of actively trying to outperform it.

Types of Gold ETFs:

• Physical Gold ETFs: These ETFs hold actual gold bullion in secure vaults. Their value directly reflects the price of the underlying gold.
• Gold Futures ETFs: These ETFs invest in gold futures contracts, which are agreements to buy or sell gold at a specific price on a future date.

Things to Consider Before Investing:

• Gold Price Fluctuations: Like any investment, the value of Gold ETFs can fluctuate. The price goes up and down depending on market conditions.
• Expense Ratio: Gold ETFs have expense ratios, which are annual fees that cover the costs of managing the fund.

About SGBs:

• Gold Bonds (SGBs) are a unique investment option introduced by the Government of India in collaboration with the Reserve Bank of India (RBI) to provide an alternative for physical gold investment. Here’s a closer look at SGBs:

What are they?

• SGBs are essentially government securities denominated in grams of gold.
• Instead of holding physical gold, you invest money in these bonds and receive returns based on the gold price and a fixed interest rate.

Benefits of SGBs:

• Safe and Secure: Unlike physical gold, which carries risks of theft or loss, SGBs are held electronically in your Demat account or in paper form if you choose. They are backed by the Government of India, adding another layer of security.
• Guaranteed Interest: SGBs offer a fixed interest rate of 2.5% per annum on the initial investment amount. This provides a steady return on your investment in addition to any potential appreciation in the gold price.
• Tax Advantages: Interest earned on SGBs is taxable as income, but there is no capital gains tax if held till maturity (8 years). Unlike physical gold, where capital gains tax can be complex.
• Liquidity: SGBs are tradable on secondary markets like stock exchanges after the lock-in period of 5 years. This allows you to exit your investment before maturity if needed.
• Hedge Against Inflation: Gold is often considered a hedge against inflation. As the price of goods and services increases, the price of gold tends to rise as well. SGBs offer a way to participate in this potential price rise.

Things to Consider:

• Lock-in Period: SGBs come with a lock-in period of 5 years, though premature redemption is allowed after this period on interest payment dates.
• Gold Price Fluctuations: The value of your SGB investment is linked to the gold price. If the gold price falls, the value of your investment will decrease as well.
• Not Physical Gold: You don’t receive physical gold with SGBs. You receive the value of the gold in rupees at maturity or redemption.

What is Digital gold?

Digital gold is a modern way to invest in gold without the hassle of physically buying and storing the metal. Here’s a breakdown of what it is and how it works:

Concept:

• Digital gold represents gold holdings that are electronically stored on behalf of investors by a trusted custodian.
• You purchase a specific amount of gold (usually measured in grams) through a mobile app, online platform, or even a jeweler partnered with a digital gold provider.

Benefits of Digital Gold:

• Convenience and Accessibility: You can buy and sell digital gold from anywhere with an internet connection, 24/7. It eliminates the need to visit a physical store or arrange secure storage for the metal.
• Fractional Investment: Unlike physical gold where you might have to buy a whole coin or bar, digital gold allows you to invest in smaller quantities, making it accessible to a wider range of investors.
• Transparency and Security: Reputable digital gold providers typically store gold in insured vaults and offer secure online platforms for transactions. You receive real-time updates on the gold price and your holdings.
• Potentially Lower Costs: Digital gold often eliminates storage and insurance charges associated with physical gold. Transaction fees might be lower compared to traditional methods.

Types of Digital Gold:

• Gold Backed Accounts: These accounts represent actual gold bullion held in secure vaults. You own a specific amount of that gold based on your investment.
• Gold ETFs (Exchange Traded Funds): While not technically “digital gold,” some platforms might offer fractional investments in gold ETFs, which track the price of physical gold.

Things to Consider:

• Underlying Asset: Ensure the digital gold provider stores physical gold backing your investment and has a transparent audit process.
• Safety and Security: Research the provider’s reputation and security measures to protect your digital holdings.
• Transaction Fees and Spreads: Compare fees for buying, selling, and storage before choosing a provider. The bid-ask spread (difference between buying and selling price) can affect profitability.
• Redemption Options: Some platforms might allow redemption for physical gold, while others may only offer conversion to cash. Understand your options beforehand.