Beginner's guide to investing in digital gold

In India, we don't need a special occasion to buy gold. Whether it's celebrating a festival or a wedding, gold is deeply woven into our cultural fabric. It symbolises prosperity and good fortune.

But as times change, so do our investment strategies. For the modern investor, especially if you're just starting, venturing into digital gold can be a smart move.

Gold prices have risen over 125% in the last 10 years, demonstrating its strength as an asset class. There are a few key reasons why digital gold deserves consideration in your starter investment portfolio —

• According to a World Gold Council report, gold can act as a hedge against inflation and currency risk.
• When markets crash or currencies weaken, gold prices often rise as investors flock to its stability. Adding some gold can balance more volatile assets like stocks.

Best Methods of Investing in Digital Gold

When looking to add digital gold exposure to your investment portfolio, you have a few good options to consider.

1) Gold ETFs

Gold ETFs (Exchange Traded Funds) offer a simple and flexible way to invest in digital gold. It is a commodity fund traded on a stock exchange that tracks the price of physical gold.

Each share of the ETF represents ownership of a small quantity of gold bars stored in certified vaults. Investing through an online trading app allows you to buy or sell units of gold ETFs just like stocks.

Pros:

• Extremely liquid - units can be bought and sold any time the market is open
• Low investment amounts, often starting around Rs 100
• Transparent holdings and prices
• No storage fees or worries

Cons:

• Has an annual expense ratio, averaging around 1 per cent
• No ownership of physical gold
• Vulnerable to systemic risks in financial markets

2) Gold Mutual Funds

Like gold ETFs, gold mutual funds aim to mirror domestic gold prices by investing in gold securities. The convenience and transparency are similar to gold ETFs but with slightly higher minimum investments.

Pros:

• Professionally managed fund
• Option for systematic investments like SIPs
• Higher returns are possible through fund selection

Cons:

• Expense ratios average 1.5-2 per cent 
• No option to take delivery of gold
• Vulnerable to systemic financial market risks

3) Sovereign Gold Bonds (SGBs)

SGBs are government-issued bonds denominated in grams of gold. You receive 2.5 per cent fixed interest paid semi-annually, and the redemption amount equals the gold price on maturity. 

Pros:

• Backed by the Indian government
• Tax efficient - interest earned is tax-free
• Can be used as collateral for loans
• Convenient buying process online

Cons:

• Locked in for 5-8 year maturity periods
• No option for early exit or trading
• Quantity limitations on the purchase of each series

When choosing between ETFs, mutual funds, and SGBs, consider factors like liquidity, costs, and investment goals. For instance, while gold ETFs offer liquidity and ease of trading, SGBs might be preferable for long-term investors due to their interest income and tax benefits.
 

Things to Keep in Mind

As you start allocating portions of your portfolio to digital gold, some key principles can help guide your approach for the best results over time. Consider the following factors carefully:

Allotting at least 5-10 per cent of your investment portfolio to gold is ideal. This allows enough exposure to benefit from long-term gold price appreciation and stability, without over-concentration. You can increase your exposure to gold as you grow older.

Perpetual Buy-on-Dips

Rather than timing the market, use dips in gold prices as buying opportunities. For example, set Rs 5,000-10,000 aside monthly to deploy whenever prices decrease by 5 per cent or more. This rupee-cost averaging over decades can lead to higher returns.

Hedge Against Crashes 

In 2020, gold prices in India saw a significant rise of 28 per cent in the rupee term, demonstrating its stability as an investment. Contrarily, the Indian stock market experienced a dramatic fall. The most notable drop occurred on March 23, 2020, when the Sensex experienced a sharp fall of 12.71 per cent in just one day.

Allocating some of your portfolio to gold could have partially offset the impact of the stock market downturn due to gold's price rise.
 

Final Thoughts

Consider gold as a safe and long-term investment. Avoid trying to guess the market's next moves and instead focus on gold's ability to provide stability to your finances. Gold can help keep your finances stable when markets are up and down. Including gold in your investment mix is a smart choice for long-term financial health.

Platforms such as Appreciate Wealth provide easy access to gold investments through their online trading app.

(Author Bio: Yogesh is a Co-Founder at Appreciate, a fintech platform helping Indians achieve their financial goals through globally diversified one-click investing.)

(This article is part of IndiaDotCom Pvt Ltd’s Consumer Connect Initiative, a paid publication programme. IDPL claims no editorial involvement and assumes no responsibility, liability or claims for any errors or omissions in the content of the article. The IDPL Editorial team is not responsible for this content.)