Digital Gold: Have you pocketed everything you need to know?

Hello fellow investors

Digital Gold is considered as one of the best and most convenient ways to invest in gold for us gold love-stuck Indians. In the past one year, every other payment app like Paytm, Google Pay and now even Amazon Pay has joined the players who offer Digital Gold. Even many stockbrokers have joined the offering to cater to the Indians' love for Gold.

The increasing gold prices and higher returns in the past 1 year have only further affirmed this love. Is this digital gold all that glittery for real? Have you looked at the fees, cost structure, and the regulations behind buying digital gold? Read this article to understand the various nuances of digital gold and things to consider before buying digital gold (only for convenience)

Digital Gold – Have you pocketed everything you need to know?

The entire mantra of Digital India has been pushed to gold as well and now an investor can purchase gold using payment apps like Paytm, Phone Pe, Google Pay, Amazon Pay, etc.

As investors, it is important to be aware of how Digital Gold functions; where is the money eventually going, and how cost-effective this investment is. Here we will break down these concepts for you and help you have a well-informed discussion about digital gold and it will offer you insights if you should go for it or not.

What is Digital Gold?

Digital Gold is a way to invest in physical gold ‘digitally’. It is offered by 3 main vendors in India – Augmont Gold; MMTC-PAMP India Pvt. Ltd (a joint venture between state-run MMTC Ltd and Swiss firm MKS PAMP) and Digital Gold India Pvt. Ltd with its Safe Gold brand. Various payment apps such as – Paytm (Safe Gold), Google Pay (MMTC-PAMP), Amazon Pay (Safe Gold), and investment platforms such as – Kuvera, Groww, and stockbrokers bring to you this digital gold in partnership with one of the three vendors. There are many new financial service providers who are adding digital gold to their bouquet of services.

So how does this work? When an investor buys gold via these apps, physical gold equivalent to that amount is kept safely in a vault under the security of the vendors. The investor can then choose to sell the gold at any time using the same app or convert it into gold coins (after reaching a certain limit).

Digital gold enables an investor to buy, sell, and accumulate pure gold of finesse 99.99 (24K gold) infractions anytime, anywhere. Thus, even with a minuscule monetary investment of INR 1, an investor can buy gold (even if it’s a minuscule quantity of it) at their convenience regardless of the time and place. What’s more, is that one can do so without worrying about the purity of gold.

Is this product really all gold?

To dig deeper into the digital gold framework and its working, we checked the buying & selling prices on various apps and compared the same to MCX gold prices.

MCX Price on 18 September was INR 51,210

As you can see from the table above, there is a clear difference between the buy and sell price of digital gold. Also, the prices on these apps are much higher than the MCX price for gold.

The gold price is higher on the platforms as they charge convenience fees, gold handling charges, trustee fees, storage charges which are all included in the gold price but there is no breakup of these charges mentioned anywhere. Additionally, a GST of 3% is also payable on the gold price.

Meanwhile, the selling price is substantially lower than the buying price and on top of it, some platforms also charge a convenience fee when you sell the gold.

Making & delivery charges – An investor can take physical delivery of gold in the form of gold coins and jewellery (Paytm has tie-ups with Kalyan Jewellers). While converting to coins, making charges and delivery charges are payable. On the Paytm app, the minimum quantity of 0.5 grams of gold is required to convert to gold coins and the charges vary from 384 for 1 gram gold coin to 944 for 10 gram gold coin (these charges and specifications varies across each app)

Apart from the additional cost, the risk of investing in digital gold is that there is no regulator for the product. When digital gold is bought, the vendor purchases gold of an equivalent amount in the investor's name. Generally, a trustee is appointed to see if the quantity and purity of gold is maintained in line with the gold purchased by the investor. However, currently, there is no regulator to oversee if the trustee is doing the work properly. This is a point of concern because even the apps which help one to buy digital gold are only a medium to buy it. Ultimately gold is stored with the vendors.

In light of the lack of regulatory framework coupled with the high cost of digital gold, other investment options of gold such as sovereign gold bonds & Gold ETF appear more viable when investing larger amounts of money and for longer periods.

On the other hand, digital gold helps us, gold love-struck Indians, to accumulate gold in smaller quantities as investing in large amounts may be out of bounds for a large section of the population. And this can be seen in the high volume of transactions seen by platforms like Paytm in a short span of time.

If you want to know more about the basics of Digital Gold, do check out our video on the same through the following link:
https://www.youtube.com/watch?v=kNnyBJw6sm4&t=2s&ab_channel=WealthCafeFinancial

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Investing in Gold

Apart from Fixed Deposits, Gold and Real Estate have been the other favourite avenues for investors in India. Gold particularly has been very close to the heart of Indian families, generation after generation.

Gold acts as a very good investment in times of high inflation as it is a natural hedge to inflation. Also, in times of uncertainties in economies and currency values, investors flock to gold as they consider it the only asset to have real value. There are a number of options through which you can invest in Gold:

Jewellery

This is the most popular form of investments by Indian households. Purchase of Jewellery by the women of the house on festive and other occasions acts like an unintended SIP wherein you invest at regular intervals.

Pros:

Easy to purchase from the next door jeweller.

Cons:

Issues with respect to purity of gold can crop up.
Regular use of jewellery results in wear and tear and reduction in the weight of the gold.
On sale of the jewellery items, making charges are deducted resulting in lower gains for the investor.
Storage of physical jewellery in a safe place is a problem.

Do you have Gold in your Portfolio?

Gold Bars and Coins

Gold bars and coins can be purchased from your local jeweller or from a bank.

Pros:

You can save on the making charges incurred for purchase of jewellery.
Gold can be bought in quantities as small as 1 gm.
Gold Bars...score over jewellery in terms of purity.

Cons:

Safe Storage is again a problem with Gold bars and coins.
They are sold at a price higher than the prevailing market price increasing your cost price.
Banks do not purchase back gold bars and coins. So you have no option but to sell it to the local jeweller which is generally at a small discount to the market price.

Gold ETFs

This is also known as paper gold. As the name suggest, Gold Electronic Traded Funds(ETFs) can be traded on the Stock exchange. Just like you purchase a share, quantities of gold can be purchased and held in your demat account.

Pros:

No Storage worries as gold purchased is directly credited to your demat account. No Purity Issues as well.
Gold can be purchased and sold at real time at the prevailing market prices.
Gold can be bought in quantities as small as 1 gm.

Cons:

You need to have a broking and demat account to buy a Gold ETF. Brokerage costs need to be incurred on both purchase and sale of Gold ETF units.

Hybrid Funds

Of late a number of Mutual Funds have launched Schemes which invest in a mix of Debt and Gold or Debt, Equity and Gold. Investing in such schemes enables you to get some exposure to the yellow metal.

Pros:

Like all other Mutual Fund Investments, these funds can be a part of your portfolio at no brokerage cost and without a demat/broking account.
No Storage costs and no Purity Issues.

Cons:

Your exposure to gold depends on the call taken by the Fund manager of the scheme.You cannot take exposure in defined quantities.
Forced to stay invested in debt/equities as a part of the Hybrid Scheme.

In the past few years, Gold ETFs have become the most popular form of investment in gold because of their obvious advantages. However, physical jewellery still enjoys the largest share of Gold sales India.

Alternative Assets / Investments - 11/05/2018

Gold Exchange Traded Funds (Gold ETFs)

In turbulent times, gold has shown up as an effective hedge against equities in a portfolio. Though there are many ways in which one can exposure to gold, investing in Gold ETFs stand out because of its many advantages and convenience.

Gold ETF is an Exchange Traded Fund that aims to track the price of gold. Just like how equity shares of a company are bought and sold on the Stock Exchange, Gold ETFs can be bought and sold on the Stock Exchange at the prevailing market price of gold.

How to Purchase: To be able to purchase a Gold ETF, one needs to have a Demat account and a trading account with any broker. Gold ETF's are traded in units wherein one unit represents one gram of gold.

This means when you buy one unit of a Gold ETF, you are buying one gram of gold and that one unit(gram) of gold will be credited to your Demat account. In case of some Gold ETFs, one unit can represent half a gram of gold. Just like equity shares, you will have to incur brokerage costs when you buy or sell Gold ETF units.

Taxation: If the units of Gold ETF are held for less than one year, then you will have to pay short-term capital gains on such sale. If the Gold ETFs are held for more than one year you can pay either at a 10% tax rate on the gains without indexation or a tax rate of 20% with indexation, whichever is lower.

GOLD ETFs in India: India has the following Gold ETFs as on date:

Birla Sun Life Gold ETF
Goldman Sachs Gold ETF
Religare Invesco Gold ETF
Quantum Gold Fund
SBI Gold ETF
IDBI Gold ETF
R*Shares Gold ETF
Axis Gold ETF
Kotak Gold ETF
ICICI Prudential Gold ETF
UTI Gold ETF
HDFC Gold ETF
Can Gold ETF

Gold ETFs are being traded in India since March 2007. Benchmark Asset Management Company Private Ltd. was the first to put in the proposal for gold ETF with the Securities and Exchange Board of India (SEBI). However, that is no longer offered on the exchange.

Advantages of Gold ETFs:

(a) An investor can purchase gold in small amounts as one unit of the ETF represents one gram. These small amounts can be accumulated over a period of time.

(b) As the gold purchased is credited to your the account, there are no hassles with respect to storage of gold purchased.

(d) Gold can be bought and sold at the prevailing market prices with no deductions with respect to making or handling charges.

(e) Compared to physical gold which has to be held for more than three years, Gold ETFs qualify for Long Term Capital gains if held for more than one year.

Gold ETFs have become the mode of investment in recent times and have been growing at a rate of over 50%.

Alternative Assets / Mutual Funds - 09/08/2018