Investing in precious metals has long been a great way to receive stable return on investment and hedge economic uncertainty. But with the introduction of digital platforms, investors have an option between Digital Gold SIP/Silver SIP and Gold/ Silver ETF. Let’s discuss why Digital Gold or Silver could be better for some investors.
Understanding the Basics
Invest in gold or invest in silver using Digital Gold SIP / Silver SIP, buy / sell gold online starting from ₹100. With a systematic investment plan (SIP) option, the investors can slowly accumulate gold or silver that aids in building wealth over the long run. This investment is secured with physical gold or silver placed under custody in vaults.
Gold/Silver ETFs (Exchange-Traded Funds), meanwhile, are funds that invest in gold or silver bullion. These can be bought and offered on stock exchanges like shares, but these usually involve demat account and additional brokerage charges.
Key Differences and Advantages
| Criteria | ETFs | Digital Gold/Silver |
| Trading Fees and Expense Ratios | Trading fees: ₹20 to ₹100 per transaction. Expense ratio: ~0.6% covering management fees and operational costs. | Small premium over market price, no recurring management fees. Cost-effective for long-term investors. |
| Correlation with Metal Prices | Lower correlation with actual gold prices, sometimes as low as 0.67. Performance may not fully reflect gold price movements. | Directly backed by physical metal, closely tied to market price, providing accurate reflection of price movements. |
| Holdings and Security | Typically holds 98% of assets in physical gold/silver, with 2% in cash or other assets, potentially diluting investment purity. | 100% backed by physical metal stored in secure vaults, ensuring pure investment directly linked to metal’s value. |
| Purity of the Metal | Pegged to gold with a purity of 99.5%, which can impact overall investment value. | Investment opportunities in gold and silver with a purity of 99.99%, ensuring highest quality precious metals. |
| Flexibility and Accessibility | Requires a demat account and can only be traded during market hours, potentially limiting accessibility. | Can be bought and sold 24/7 through various online platforms, providing greater flexibility and convenience. |
Charges on ETF transactions:
Now, let us analyze the charges, fees, tax components that are charged on ETFs:
- Brokerage Charges: Typically around 0.5% of the transaction value or a minimum of ₹20 per transaction (for buy as well as sell transaction) on traditional brokerage platforms.
- Exchange Transaction Charges: Approximately 0.00325% of the transaction value.
- SEBI Turnover Fees: 0.0002% of the transaction value.
- GST: 18% on brokerage and transaction charges.
- Securities Transaction Tax (STT): 0.001% on the buy side.
- Stamp Duty: 0.015% of the transaction value.
Comparing the impact on a small transaction vs a large transaction:
| Transaction Size | Brokerage Charges (on traditional brokerage platforms) | Exchange Transaction Charges | SEBI Turnover Fees | GST | STT | Stamp Duty | Total Charges |
|---|---|---|---|---|---|---|---|
| Small Transaction (₹100) | ₹20 (minimum charge) | ₹0.00325 | ₹0.0002 | ₹3.60 (18% of ₹20) | ₹0.001 | ₹0.015 | ₹23.61945 (23.62% of transaction value - same charges apply on sale transaction) |
| Larger Transaction (₹10,000) | ₹50 (0.5% of ₹10,000) | ₹0.325 | ₹0.02 | ₹9.06 (18% of ₹50.325) | ₹0.1 | ₹1.5 | ₹61.005 (0.61% of transaction value - 1.22% if you consider the sale transaction during liquidation) |
Why Digital Gold or Silver is Superior for SIPs
For small transactions, such as a ₹100 investment, the charges associated with buying an ETF are disproportionately high. In this example, the total charges amount to ₹23.62, which is 23.62% of the transaction value. This makes small investments in ETFs highly inefficient.
In contrast, Digital Gold or Silver does not have such high transaction fees, making it a much more cost-effective option for small, regular investments. This is particularly beneficial for systematic investment plans (SIPs), where investors typically invest small amounts regularly.
Long-Term Investment Comparison
For larger transactions, such as ₹10,000, the charges for ETFs on traditional brokerage platforms are more reasonable at 0.61% of the transaction value, but considering the same charges apply during sale of units, 1.22% of the transaction value (ignoring the growth of asset value) makes it significant. For example, if the asset has doubled in value, the total charges (on buy and sell added) would be 1.83%. In addition, when considering a long-term investment over 4 years, the expense ratio and other factors significantly impact the overall returns.
- Expense Ratio Impact: Assuming an expense ratio of 0.6%, the compounded expense ratio over 4 years would be approximately 2.43% (considering annual compounding).
- Purity and Holdings Impact: The slight drop in purity (99.5% vs. 99.99%) and the 2% holding in non-gold assets further dilute the investment’s value.
Let’s break down the impact:
- Initial Investment: ₹10,000
- Expense Ratio Impact: ₹10,000 * (1 - 0.006)^4 ≈ ₹9,760
- Purity and Holdings Impact: Assuming a 1% impact due to purity and holdings, the value further reduces to ₹9,662.40
In contrast, Digital Gold or Silver, with no recurring expense ratio and higher purity, retains more of its value over time.
Conclusion
While both Digital Gold/Silver and Gold/Silver ETFs have their merits, the choice ultimately depends on your investment goals, risk tolerance, and preference for flexibility. Digital gold/silver offers a cost-effective, flexible, and pure investment option, making it an attractive choice for many investors, especially for small, regular investments through SIPs and long term investments in general.
Further reading on the topic.
Invest wisely and diversify your portfolio with eBullion’s digital gold and silver offerings! Visit https://ebullion.in
FAQs
Q1: What is digital gold investment and how does it work?
Digital gold investment allows you to buy gold online starting from ₹100. Your investment is backed by 100% physical gold stored in secure vaults. This makes digital gold a flexible and safe option compared to gold ETFs.
Q2: Is digital silver safe to invest in?
Yes, digital silver is 100% backed by physical silver stored in insured vaults. Investing in digital silver online provides security and convenience, unlike ETFs which require a demat account.
Q3: Digital gold vs gold ETFs – which is better for small investments?
For small investments, digital gold is better because it allows micro-investments with low fees. Gold ETFs charge transaction fees and have market hour restrictions, making them less efficient for small, regular investments.
Q4: Can I convert digital gold or silver into physical metal?
Yes, most platforms, including eBullion, allow you to convert digital gold or digital silver into physical gold or silver, giving investors full ownership of the metal.
Q5: How does investing in digital gold or silver compare with ETFs?
Digital gold and silver offer higher purity (99.99%) and 24/7 online trading. ETFs have lower purity (99.5%) and are limited to stock market timings. Digital investments are cost-effective and ideal for SIPs or regular small investments.
Q6: What are the advantages of digital gold and silver investment over ETFs?
No demat account required
Lower transaction fees for small investments
Higher purity of metal
24/7 online access and liquidity
Directly backed by physical gold/silver
Q7: Can I start digital gold or silver investment online with just ₹100?
Yes, digital gold and silver investments are accessible online starting from ₹100, making them ideal for beginners and regular investors compared to ETFs which are less suitable for small investments.
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