Investing in gold can be done through various means, with Gold ETFs and digital gold being two popular options. Customers who are used to using sophisticated new age brokerage platforms find Gold ETF a convenient option. However, there is a large demographic among the customers which would like to be more aware of the complexities involved in both the options. Here's a detailed comparison to help you understand the pros and cons of each from the above mentioned perspective:
Gold ETFs on new age sophisticated brokerage Platforms
1. Zero Brokerage Charges:
- If you invest in a Gold ETF on such platforms, you won't pay any brokerage fees. This is a significant advantage over digital gold, which incurs a 3% GST on purchase.
2. Volatility at Two Levels:
- Gold Price Volatility: The price of gold fluctuates constantly due to market conditions.
- ETF Liquidity and Spread: The buy vs sell spread can vary during intraday trading based on demand and supply.
- Example: Suppose the gold price drops by 1% in a day. The ETF might reflect this drop, but if the ETF itself has low liquidity, the spread between the buying and selling price could widen, making it harder to sell at the desired price.
3. Tracking and Correlation Challenges:
- Example: If you bought gold when it was ₹7,500 per gram and the Gold ETF unit price was ₹65, after a few months, gold might be trading at ₹8,500 per gram. However, the ETF unit price might not reflect the same percentage increase due to factors like liquidity, demand, and the buy-sell spread. This makes it challenging for investors to track and correlate the returns accurately.
Digital Gold on Platforms like eBullion
1. GST:
- Example: If you buy ₹1,00 worth of digital gold, you pay an additional ₹3 as GST. This upfront cost can be a disadvantage compared to Gold ETFs with zero brokerage.
2. Simplicity and Direct Ownership:
- Digital gold is straightforward. You buy and own gold directly without worrying about the liquidity of an ETF or the spread. This can be less confusing for an average investor.
3. Ease of Tracking:
- Example: When you buy digital gold, the price you pay is directly linked to the market price of gold. If gold prices increase from ₹7,500 to ₹8,500 per gram, your investment value increases proportionally, making it easier to track and understand your returns.
Delving deeper
1. Volatility and Spread:
- Scenario: An investor buys a Gold ETF worth ₹10,000. During a volatile market day, the gold price drops by 2%. The ETF price might drop similarly, but due to low liquidity, the spread widens. The investor might see a buy price of ₹9,800 and a sell price of ₹9,600, making it challenging to sell without incurring a loss.
2. GST Impact on Digital Gold:
- Scenario: An investor buys ₹10,000 worth of digital gold and pays ₹300 as GST. If the gold price increases by 3% over time, the investor's gold value becomes ₹10,300. However, the initial GST payment means the net gain is only ₹300, effectively nullifying the profit.
3. Tracking and Correlation:
- Scenario: An investor buys gold at ₹7,500 per gram and a Gold ETF at ₹65 per unit. After a few months, gold prices rise to ₹8,500 per gram. The investor checks the ETF price, which might be ₹72 per unit due to various market factors. Calculating whether the returns match the gold price increase and considering the buy-sell spread adds complexity.
Conclusion
While Gold ETFs offer the advantage of zero brokerage on sophisticated new age brokerage platforms, they come with complexities like dual-level volatility, liquidity issues, and tracking challenges. Digital gold, despite the 3% GST, provides a simpler and more direct investment experience, which can be more suitable for average investors. Visit https://ebullion.in/
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