Digital Gold Investment 2022: Benefits & Ways to Invest In Digital Gold
Ways of investing in gold
India is one of the biggest consumers of gold in the world. We Indians love our gold, and we buy it in various forms such as jewellery, coins, gold ETFs. gold mutual funds, Sovereign Gold Bonds (SGBs), digital gold, etc. In this article, we will understand the performance of gold as an asset class, its importance in asset allocation, what should be the proportion of gold in your investment portfolio, and how to buy digital gold.
Why should an investor invest in gold as an asset class?
Gold as an asset class has performed very well in the last 20 years. During this period, the price of gold went up from less than Rs. 500/gram to more than Rs. 4,200/gram. In the last 20 years, the price of gold has multiplied approximately 10 times, which is a very good return on investment.
As seen in the above chart, the price of gold kept rising continuously from 2001 to 2013. It then consolidated from 2013 to 2019 and then saw a big rise in 2020. After touching a peak of around Rs. 5,000/gram, it has cooled off to Rs. 4,000/gram. Since then, it has been consolidating in the range of Rs. 4,000-4,500.
Comparison of gold performance with other asset classes
While gold has done well as an individual asset class in the last 20 years, let us now compare its performance with other asset classes such as equity and debt..
Note: The period considered is from 1st Jan 2000 to 27th Aug 2021. The equity returns are represented by Nifty 50 TRI, debt by CRISIL Composite Bond Fund Index, and gold by MCX Spot Gold prices.
As seen in the above chart, during the last 15 years, equity gave a return of 15% CAGR, and gold was slightly lower at 13.1% CAGR. The comparable performance of gold with equity is very good.
Importance of gold in asset allocation
In the above section, we saw that gold and equity have given good returns over the long term. Now, let us see the returns given by different asset classes on an annual basis.
Note: The gold returns are represented by MCX Gold Futures prices, equity by S&P BSE 100 TRI, and debt by CRISIL Short Term Bond Fund Index returns.
As seen in the above table, in the last 10 years:
- Gold was the best performer in 5 years,
- Equity was the best performer in 3 years
- Debt was the best performer in 2 years
From among various asset classes, as gold was the best performer in 5 of the last 10 years, it shows the importance of gold in asset allocation.
What should be the proportion of gold in your portfolio?
In the above section, we have understood the importance of gold in asset allocation. Now, the question that comes to mind is what should be the proportion of gold in your investment portfolio? The proportion of gold in your investment portfolio can vary from 5-20%.
As seen in the above image, the past 15+ years of performance analysis of a ‘buy and hold portfolio’ strategy with appropriate allocation to Nifty and gold reduced the loss probability on a 5-year rolling basis. At a Nifty and gold proportion in the 80:20 ratio, the loss probability got reduced to 0% on a 5-year rolling basis. Rolling returns are the average annualised returns calculated for a given time period (in our example it is 5-year rolling returns from 2nd Jan 2006 to 27th Aug 2021).
Accordingly, you can take a call on your asset allocation on how much proportion you should allocate to equity, gold, and debt.
What is Digital Gold and its features?
Now that you understand the proportion of gold that you should have in your investment portfolio, the next question that comes to mind is how do we buy the gold. As discussed at the start of the article, an investor can buy gold in various ways. But, in this article, we will focus on digital gold.
As the name suggests, digital gold is the process of buying gold in electronic format. You can buy digital gold with a minimum amount as low as Re. 1. Following companies offer digital gold:
- MMTC-PAMP India Private Limited
- Augmont Gold
- Digital Gold India Private Limited
The companies mentioned above back it up when you buy digital gold by buying physical gold on your behalf. The benefits of buying digital gold include:
- Highest purity: The gold is of 999.9 / 24K purity, which is the highest purity you can get.
- Transparent pricing: The gold prices are linked to international market rates available 24 hours a day, 365 days a year. So, there is absolute transparency in pricing.
- 100% security with certified vaults: The digital gold you buy is backed up by the purchase of physical gold on your behalf. The company purchases the physical gold and stores it in fully insured, certified vaults in highly secured premises.
- Redemption options: You can redeem your digital gold by taking delivery of physical gold at any time or selling your gold to the company.
Low minimum amount: The minimum transaction amount for the purchase of digital gold can range from Re. 1 to Rs. 1,000. Most partner platforms will allow you to purchase digital starting from as low as Re. 1.
What is the Best Way to Invest in Digital Gold?
To begin, go to a digital gold investing platform like Groww, Paytm, HDFC Securities, Motilal Oswal, and others.
When you're on their platform, you'll need to do the following:
1. Enter a sum in INR or grams – You can buy gold for a specific amount or by weight at the current market rate.
2. Select a payment method — After completing the KYC procedure, you will be presented with several payment alternatives, including an account, a card, or a wallet.
3. Keep your gold in a safe place – Your account is instantaneously updated and accessible 24 hours a day, 7 days a week.
4. Sell whenever you want - You have the option of selling your gold digitally to the platform at any time.
Disadvantages of Investing Digital Gold
- There is a limit of Rs.2 lakhs on most sites for investment.
- The absence of a government-run regulatory authority such as the RBI or SEBI.
- The price of gold is then raised as a result of shipping and manufacturing costs.
- Companies may only offer a limited storage period after which you must either take a physical receipt of the gold or sell it.
The Bottom Line
Gold, as an investment class, should surely make up a small part of our portfolios. However, Sovereign Gold Bonds and Gold ETFs are better alternatives to invest in gold than Digital gold.
The fundamental reason for this is that gold should be part of a long-term investment strategy. Gold bonds are preferred in this sense because they pay an additional 2.5 percent in interest. Gold ETFs, on the other hand, are better for short-term hedges because they are regulated by SEBI. Bonds, after all, are less liquid.
Gold as a part of your portfolio
In the above sections, we have discussed why an investor should invest in gold, its proportion in the investment portfolio, and the features of digital gold. Now that you understand the importance of digital gold, invest in Glide Portfolios which offers diversification across assets.
Based on your risk profile, your asset allocation will be decided, and you will get the recommendations for the appropriate mutual fund schemes. You will get advice on how to plan and systematically invest towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved
Q1: Is it a recommended idea to put money into digital gold?
A1: Investing in gold through ETFs and gold funds is regarded as a better investment option than buying physical gold because the latter comes with hefty fees in the form of manufacturing charges, which are subtracted when the gold product is sold.
Q2: Is it possible to acquire real gold from digital gold?
A2: You can use the digital gold you purchased as security for online loans. Your purchase is not only stored carefully, but it is also fully insured. Finally, you can trade it in for physical gold in the form of jewellery, coins, and bullion.
Q3: Is digital gold subject to taxation?
A3: Returns on digital gold assets kept for less than 36 months aren't subject to rigorous taxation. Long-term capital gains would be subject to a 20% tax rate on the entire amount, plus a surcharge and a 4% cess with indexation benefits.
Q4: Is it possible to sell digital gold at any time?
A4: Customers can sell their gold at any moment at current market rates in rupees or grams. They can also take physical custody of the gold, such as coins or jewellery, after deducting any manufacturing and packaging fees. There is no limit to the amount of digital gold that can be purchased.
Q5: How should one redeem digital gold?
A5: You must first determine whether you want to redeem your digital gold in coins, cash, bars, or any other form. After that, decide how much gold you want to redeem. You must choose several coins, cash amounts, or bars based on the quantity.