Which is the Better Form of Investment in Gold – Physical or Electronic?

Gold is just not limited to buy jewellery or ornaments (physical form), it has created a niche for itself and has grown into much different preference.

Updated: Tuesday, January 28, 2020, 12:09 [IST]

Gold, the yellow metal has greater importance owing to cultural and social reasons in India. Since many decades, the word gold goes hand in hand with status, wealth, protection and security. In India, most of the traditional families even today have the habit of purchasing gold on various festivals and special occasions be it a birthday, wedding anniversary, marriage, childbirth, Akshaya Tritiya, Dhantera, Deepavali, Betrothal Ceremony and the list goes on. In addition to this gifting of gold within the family members still prevails in the country and hence most of the Indian families will acquire or invest a chunk of their savings in the purchase of gold or gold ornaments.

Today gold is just not limited to buy jewellery or ornaments (physical form), it has created a niche for itself and has grown into much different preference. People in India can now invest in the yellow metal either through any of the following means be it gold ETFs, gold in electronic form, gold mutual funds, gold-related schemes, gold bullion.

As gold acts as a good hedge, its impact on the economy of a nation wanes and waxes depending on the performance of other forms of investment. At a time when other investments look risks, investors seek refuge in gold which is touted as a safe-haven asset. The price of gold will determine the health of the economy. Any kind of geopolitical and economic uncertain situation across the globe will also impact the gold prices daily.

Which is the Better Form of Investment in Gold – Physical or Electronic?

The prices of the yellow metal have witnessed a phenomenal growth in the last few years as the recently concluded trade war between the U.S. and China helped the gold to gain over 18% alone during the year 2019, its best performance so far since 2001 financial crisis.

Advantages of Investment in Gold

Gold acts as an ideal hedge for tackling financial market risks
Demand for gold is strong globally
Highly liquid asset
Diversification with gold balances inflation
Get tax benefits

Disadvantages of Investment in Gold

Difficult to store physical gold
Gold does not fetch yield on investment
Volatile nature of gold makes it difficult to determine its future price
Investment in Gold ETFs will include brokerage fee
Purchase price of gold jewellery includes making charges, wastage and design charges
Buying a large amount of bullion will attract storage fees.

Let's know in detail about the different forms of gold investments available in India.

Physical Gold

Gold can be purchased in the form of jewellery pieces which comes in an array of designs or in the form of coins or gold bars and this constitutes the physical form of gold purchase. This is one of the oldest and the most common form of gold purchase in India. As a gold loving country, Indian's prefer to purchase gold in its physical form as a part of their investment plans. The drawback of this is most of the jewelers levy making or wastage or design charges on the ornaments which have to be borne by the purchaser at the time of purchase. The charges borne by the buyer is irrecoverable as the purchaser cannot get back his invested money on the charges levied on him/her at the time of purchase when they decide to sell in future.

The storage of gold is also an added challenge as the purchased gold has to be kept either safely at home or in a bank locker, for which the investor has to again shell out some money.

Gold Bullion

Purchase of gold in the form of bullions, bars or coins is one of the most popular forms of gold investment options, especially for those who prefer to purchase physical gold. These gold bars and bullions are made up of a purest physical form of gold and most of the investors are inclined towards investing in this form of gold apart from the purchase of jewellery items.

The advantage of gold bullion is it is easily recognizable and easy to find buyers. The drawback of investing in this form of gold is safety, storage factor.

Gold ETFs

Investing in gold ETFs (Exchange Traded Funds) is another form of investing in gold. These ETFs act like individual stocks and they trade even on an exchange similar to equities. The gold ETFs are units which represent the physical gold which may be in the dematerialised form or paper form. They are open-ended funds which mainly trade on major stock exchanges. Investors have an option to buy these gold ETFs online and can store them in their demat account.

Please Note: 1 Gold ETF unit = 1 gram of gold

The advantage of investing in gold ETFs is security and cost-efficiency. Unlike physical gold, it nullifies the storage and making charges. Investors can purchase it at the international rate without any markup.

Gold in Electronic Form

The purchase of gold in electronic form or e-gold is another option to invest in gold in India. The e-gold will be held electronically in the demat form and can be converted into physical gold, freely. In India, the e-gold is currently offered by the National Spot Exchange Limited (NSEL). Investors can purchase gold in miniature quantity on the NSEL and can sell it after making a profit. An investor even has an option of taking the physical delivery of the yellow metal.

Gold Mutual Funds

The gold mutual fund invests mostly in gold producing companies or gold bullion and in this way it diversifies investor's investment portfolio. This kind of investment is ideal for those who wish to protect their capital against political instability or inflation. The advantage of investing in the gold mutual fund is investors can opt for investing in the precious metal without having a demat account. Investors can reap the benefits of the potential value of gold without having to possess tangible gold.

Apart from this it also allows for easy trading through a fund manager or a stockbroker. It can be subscribed for more than a year and one can reap better capital gain over a long term period.

Gold-Related Schemes

Recently, the government of India has launched gold related schemes to promote the purchase of gold in electronic form and it includes Gold Sovereign Bond Scheme, Gold Monetisation Scheme and Indian Gold Coin Scheme.

As per the Gold Sovereign Bond Scheme, the gold bonds will be issued every month and these issues will be offered in tranches by the country's Central Bank - RBI in consultation with the government of India. The bonds will be denominated in multiples of a gram of gold with the minimum unit of 1 gram. These bonds will fetch an interest which stands at 2.50% per year and payable semi-annually, based on the nominal value.

Gold Monetisation Scheme is like a term deposit in gold. Under this scheme, customers can deposit their idle gold which in turn will fetch them interest, safety and so on. Any eligible depositor can opt for gold monetisation scheme and deposit their precious metal in the Medium and Long Term Government Deposit (MLTGD) Scheme. The Medium-Term Government Deposit can be made for a tenure ranging between 5 - 7 years and the Long Term Government Deposit can opt for 12 - 15 years. These deposits will be accepted by respective banks on behalf of the Central government.

Indian Gold Coin Scheme is the first national gold offering started by the Indian government. It was launched to abate the country's gold imports and at the same time to encourage investment in gold amongst the investor community for promoting India's economic growth. Promoted as the first national gold coin, it has the face of Mahatma Gandhi on one side and the images of Ashoka Chakra on the other side. It is available in variable denominations which includes - 5 gm, 10 gm and 20 gm respectively.

Hallmarked by the Bureau of Indian Standards (BIS), the gold coins are minted by the Security Printing and Minting Corporation of India Limited (SPMCIL). These coins have 24 karat purity with 999 fineness. Apart from this, it also has anti-counterfeit features and comes up with tamper-proof packaging to check against fraudulence.

About the Author

Archana has been covering investment planning and personal finance for more than two years.