In the past few years, investment in gold has gradually transitioned from physical to digital means. This shift is due to the introduction of financial instruments like Gold Exchange-Traded Funds (ETFs), Gold Mutual Funds, and Sovereign Gold Bonds. These have become increasingly popular due to challenges linked to the storage and safety of physical gold.
The Connection Between Gold and Indian Households
According to a report by Jefferies, an American investment banking and capital markets firm, as of March 2023, 15.5% of total Indian household assets are in Gold. The only asset class with a higher share is real estate, accounting for 50.7%. Other assets include bank deposits (14%), insurance funds (5.9%), provident and pension funds (5.8%), equities (4.7%), and cash (3.4%). A study by Quantum Mutual Fund suggests that a 10-15% portfolio allocation to gold is ideal to balance risk and return, indicating that Indian households, known for their affinity for gold, are on the right track.
Transitioning from Physical to Digital Gold
Historically, Indians have saved in gold by buying small pieces of jewellery or gold bars and coins. However, the purity of such investments is not always guaranteed, and they come with storage costs and issues like retailer mark-ups and lower resale value. But the rise of a more digitalised economy and a wider reach of banking facilities has gradually shifted consumer preference towards digital gold. Investments like Gold ETFs and SGBs are therefore gaining popularity.
The Various Digital Avenues for Gold Investment
Digital avenues for investment in gold range from Gold ETFs, which aim to track the domestic physical gold price, to Gold Mutual Funds, which are professionally managed funds that invest in a variety of gold-related assets. Sovereign Gold Bonds (SGBs) are another form of digital gold launched by the Indian Government in November 2015 with the aim of converting the domestic demand for physical gold into financial savings.
Details About Sovereign Gold Bonds
Sovereign Gold Bonds are issued by the Reserve Bank of India on behalf of the Government of India. The investment limit is 4 Kg for individuals, 4 Kg for HUF, and 20 Kg for trusts and similar entities per fiscal year. SGBs can also be used as collateral for loans and provide a fixed interest rate of 2.50% per annum. Importantly, the capital gains tax arising on redemption of SGB to an individual is exempted.
Digital Gold: A Convenient Form of Investment
Digital gold allows investors to buy gold in small denominations online, eliminating the need to worry about storage and safety concerns associated with physical gold. Many digital payment platforms and investment apps provide facilities for investing in digital gold.
Understanding Exchange Traded Fund (ETF)
An Exchange-Traded Fund (ETF) is a type of security that trades on an exchange like a stock. It reflects the composition of an index, like BSE Sensex, and its trading value is based on the Net Asset Value (NAV) of the underlying stocks. Unlike mutual funds that only trade once a day after the market closes, ETF share prices fluctuate all day as they are bought and sold. Bond ETFs are a type of ETFs that can include different types of bonds including government, corporate, and municipal bonds. Along with being cost-efficient, ETFs offer a diversified investment portfolio to investors.
Previous Year Questions (PYQs) Related to Bond Yields and Financial Instruments
In the UPSC Civil Services Examination, there have been questions related to bond yields and financial instruments like IFC Masala Bonds and government schemes like Sovereign Gold Bond Scheme and Gold Monetization Scheme. Knowledge about these concepts and instruments is therefore vital for aspirants of this competitive examination.
