Investing in gold: I got an opportunity to purchase digital gold online. However, I am not clear about gold ETFs, SGBs, digital gold 

I discovered the opportunity to purchase digital gold through Phonepe recently. It seemed appealing as the price of gold tends to consistently rise with rare dips that can be recovered. However, after reading a Reddit post questioning its benefits due to GST implications, I became curious about Sovereign Gold Bonds (SGBs) and Exchange-Traded Funds (ETFs). Could someone kindly explain these investment options to me and provide guidance on how to get started with them?

Advice by Yash Sedani, Assistant Vice President, Investment Strategy at 1 Finance

Gold continues to be a preferred investment choice, especially during times of inflation and economic uncertainty. It not only helps diversify portfolios but also acts as a hedge against market volatility. Here are some popular and accessible ways to invest in gold today:

1. Gold ETFs (Exchange-Traded Funds): They track the price of physical gold and are traded on stock exchanges just like equities. They offer high liquidity, transparency, and lower costs compared to buying physical gold. These are ideal for investors who want gold exposure without storage concerns.

2. Gold Mutual Funds: These funds invest in gold ETFs or gold-related securities and can be accessed through Systematic Investment Plans (SIPs). Gold mutual funds are a great choice for investors looking for long-term, disciplined exposure to gold.

3. Sovereign Gold Bonds (SGBs): Issued by the Government of India, SGBs provide a dual benefit:

A fixed 2.5% annual interest, paid semi-annually

Potential price appreciation of gold at maturity

These bonds are issued in tranches throughout the year and are ideal for those looking for a secure and tax-efficient gold investment.

4. Digital Gold: Available through mobile wallets and banking apps, digital gold allows investors to buy gold in denominations as small as Rs 1. It's a convenient and flexible option for those who prefer digital transactions without physical handling.

5. Gold Saving Schemes: Offered by jewellers, these schemes allow investors to deposit a fixed amount monthly. At maturity, the accumulated value can be redeemed in the form of gold jewellery. This is a good option for individuals planning for future purchases like weddings or festive occasions.

Each of these options caters to different financial goals and investment styles—whether you want returns, convenience, or future consumption in mind. Choose the one that fits your needs best.

Efficient investment

Sovereign Gold Bonds (SGBs) and Gold ETFs are more efficient and cost-effective ways to invest in gold when compared to physical or digital gold, especially if your intent is purely investment-focused.

Tax and Charges:

Digital and physical gold attract 3% GST on purchase, and physical gold also incurs making charges (10–20%) if converted to jewellery. In contrast, SGBs and ETFs don’t attract GST, making them more cost-efficient.

Returns and Costs:

Gold ETFs come with an annual expense ratio (typically 0.3% to 1%), which slightly eats into returns. On the other hand, SGBs not only have no annual charges but also offer 2.5% annual interest, making them highly attractive for long-term investors.

Liquidity and Price Fluctuation:

ETFs are traded on stock exchanges and can be bought or sold anytime, but they often trade at a premium or discount to the actual gold price due to market supply-demand gaps. This can distort the true returns.

SGBs are also listed on exchanges, but if held till maturity (8 years), you get the full gold price as per the RBI’s fixed rate, unaffected by market volatility. However, since there have been no new issues of SGBs recently, you can only buy them from the secondary market, which, like ETFs, may face liquidity and pricing issues.

Here in the image is the detailed comparison of returns across various modes of gold investment. (Source:  1 Finance)