Us Indians have always had a deep love for gold, and it is especially evident during festive seasons such as Diwali and Dhanteras, as well as joyful celebrations like weddings. It’s not just a cultural symbol for us but also a smart investment that helps to diversify portfolios and guard against inflation. Traditionally, people buy physical gold, that is gold in the form of coins, biscuits, bars, or jewellery.
But nowadays, you can buy gold digitally, making investing in gold easier than ever. So let’s take a look at a few things to keep in mind before you make your digital gold investment this Holi!
Understanding Digital Gold
Investing in digital gold means investing in gold without physically owning the metal. Investing digitally offers accessibility anytime and from anywhere which while offering convenience, also eliminates the concerns about storage or theft. Digital gold represents 99.9% 24K pure gold which is the highest purity, so one doesn’t have to worry about quality or wear and tear either.
Trading digital gold is easier compared to physical gold, and one can make investments in small amounts regularly. This method is getting increasingly popular among Indians and can be accessed through various ways such as Gold ETFs, Gold Mutual Funds, Gold Futures Contracts, and Sovereign Gold Bonds.
Also Read: Why is There a Transition From Physical Gold to Digital Gold Investments?
Factors to Consider Before Investing in Digital Gold
Before you start your digital gold journey this Holi, here are some important factors you should consider before making the final decision:
Timing Your Investment Around Holi
Gold has historically proven itself to be a reliable hedge against inflation. That means when inflation is high, the purchasing power of a currency diminishes. Gold, however, tends to keep up its value during times of inflation because of reasons such as tangibility and limited supply. This property makes gold a smart investment option during periods of economic uncertainty and rising inflation.
Another good time to invest in gold is when there is geopolitical turmoil. A war may significantly cause the value of some assets to go down, but gold tends to retain its value well or sometimes even increase in price. Thus timing is the first factor one should consider before buying digital gold.
Setting Investment Goals and Budget
The investments you make in digital gold must align with your overall financial plan, so the second important factor to consider is your financial goals and budget. Your long and short term financial goals will play a big role in determining the amount and duration of your investment in gold. Digital gold is also a great way to diversify your portfolio. When equity markets are volatile, having a portion of your investments in gold can provide stability and reduce risks.
On top of that one can invest in digital gold in small amounts so you need not break the bank to start investing. Investors who have a low budget but want to invest in gold can take advantage of this flexibility offered by digital gold and gradually build their investment portfolio over time through Systematic Investment Plans (SIPs).
Security Measures and Risk Mitigation
One of the biggest concerns when people buy physical gold is security. Storing gold at home can lead to constant worry about theft, while storing it in a bank may incur extra costs and restrictions on access. Investing in digital gold alleviates such worries. Your investment is stored in your demat account, and the actual gold is stored in secure physical vaults, which are safer than bank lockers.
As far as risk mitigation goes, digital gold is a good portfolio diversifier. Adding digital gold to your investment mix can spread your risk across different asset classes which reduces your exposure to market fluctuations. Digital gold also has a low correlation with assets such as stocks and bonds, which further adds to its potential for mitigating any risks. Conservative investors with a long term horizon can invest in sovereign gold bonds (SGB), which are backed by the government so there is no risk of default. Another advantage of SGB is that if you hold them for the full tenure, the long term capital gain (LTCG) tax is exempt.
Monitoring and Managing Your Investment
A key part of investment planning is regularly monitoring and managing your investment as situations change, and it’s no different when it comes to digital gold. Track how your gold investment is performing and stay informed about market trends and developments. A big advantage of investing digitally is that your investment provides high liquidity, which means you can convert it into cash very quickly. But remember that if you are investing in sovereign gold bonds, there is a lock-in period during which you cannot redeem your investment.
Tax Implications
And finally, you should analyse how digital gold investments align with your tax planning. Generally, taxation on digital gold works the same way as it does with physical gold, but with some small differences. Investors buying physical or digital gold must pay a 3% Goods and Services Tax (GST). The rules that govern taxation on the sale of gold are covered in the Income Tax Act and state that if you sell your investment before 36 months from the date of purchase, short term capital gains tax is applicable on the profit, and the STCG rate depends upon the individual slab rates.
If you sell the gold investment after 36 months however, long term capital gains tax will be applicable on the profit you make with a tax rate of 20% along with a 4% cess on LTCG resulting in an overall taxable rate of 20.8%. If you hold your
Sovereign Gold Bonds investment until maturity, the LTCG is exempt.
Understanding the tax implications of your digital gold investments is very important as it allows you to maximise returns, minimise liabilities, and improve your tax efficiency.
Also Read: What is The Difference Between Digital Gold and Physical Gold Investments?
Wrapping Up
Digital gold is a convenient and secure option for investors looking to invest in gold, and it eliminates concerns about security and impurity which are generally associated with physical gold. Before you start investing, it’s important to weigh the factors we’ve discussed above – timing, goals, budget, risks, and taxation implications. Based on your time horizon, financial dreams, and risk tolerance, you can choose the most suitable option from gold ETFs, gold mutual funds, digital gold, or Sovereign Gold Bonds.
An important point to note is that unlike gold ETFs and mutual funds, which fall under SEBI’s oversight, digital gold remains unregulated by RBI or SEBI. Experts also recommend that one should refrain from bulk buying due to potential price volatility and limit gold investments to no more than 5% to 10% of the overall portfolio. An investment advisor can give you guidance tailored to your specific financial situation, recommend suitable gold exposure, and help you understand each investment option so you can make informed decisions.
So this Holi, let gold be the palette! Happy Holi!
