Investing in precious metals has always been a popular strategy for diversifying portfolios and hedging against economic uncertainties. However, with the advent of digital platforms, investors now face a choice between Digital Gold/Silver and Gold/Silver ETFs. Let’s explore why Digital Gold or Silver might be the preferred option for certain investors.
Understanding the Basics
Digital Gold/Silver allows you to buy and sell gold or silver online in small fractions, starting from as little as ₹100. This investment is backed by physical gold or silver stored securely in vaults.
Gold/Silver ETFs (Exchange-Traded Funds), on the other hand, are funds that invest in gold or silver bullion. These can be traded on stock exchanges just like shares.
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.
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