Investors need to be cautious as there’s no regulatory mechanism for the product
There are safeguards in the form of trustees and insurance cover to protect the interests of investors
Imagine being able to buy physical gold for as low an investment amount as ₹1 from the comfort of your home, without worrying about its purity, safety and storage. These are some of the advantages that are being marketed to investors of digital gold. Let’s take a closer look at its features to understand if you should consider investing through it.
Simply put, digital gold is a mode of investing in physical gold.
Who offers it?
It is offered by vendors or producers such as MMTC-PAMP India Pvt Ltd and Digital Gold India Pvt. Ltd. MMTC-PAMP is a joint venture between Metals and Minerals Trading Corp. (MMTC), a government of India initiative, and Switzerland-based MKS PAMP. Digital Gold India offers SafeGold, a product backed by private equity (PE) funds; the World Gold Council, too, has a minority stake in the company.
The product is distributed through the digital platforms of banks, broking and fintech companies and others appointed by the vendors. For instance, MMTC-PAMP has appointed Motilal Oswal Financial Services Ltd, Stock Holding Corp. of India Ltd, and Paytm, among others, as its distributors, while SafeGold is distributed through ICICI Bank, Paisabazaar and others.
Price and purity: The prices are decided by the issuers or vendors. “Gold prices we offer on the digital gold platform are extremely competitive and uniform across the country. The rate is based on international price of gold, the USD-INR exchange rate and customs duty that is currently applicable. These rates fluctuate based on market conditions," said Krishna Hegde, president-consumer, MMTC-PAMP.
Investors can buy and accumulate gold with as low an investment as ₹1. It can go higher, though, depending on the issuer or distributor. For example, on MOFSL’s platform, the minimum ticket size is ₹1,000, while Paisabazaar offers SafeGold for a minimum investment of ₹100.
The purity of gold is assured by the issuer. MMTC-PAMP offers 24-carat gold of 999.9 purity, which is the highest quality of gold, while SafeGold is 24-carat gold of 995 purity.
Storage: The physical gold you buy is held in the custody of the issuer till such time that you choose to sell or have the gold delivered. In case of MMTC-PAMP, the gold is stored in vaults for five years without any additional charge. SafeGold is stored for two years.
Redemption: You can redeem the gold by either selling it back to the vendor at applicable prices, or take the delivery of physical gold. To take the delivery, the accumulated gold has to be at least 1gm in the case of MMTC-PAMP and 0.5gm in the case of SafeGold. There is a charge to be borne by the investor for minting and delivery.
Investors are also given the option to redeem the accumulated gold against jewellery purchased from approved jewellers.
Safeguards: There are measures put in place to safeguard the interests of investors in the form of trustees and insurance cover. Both MMTC-PAMP and Digital Gold India have appointed IDBI Trusteeship Services Ltd as their trustee. Among other things, the trustee ensures the quality of the gold and that the gold sold to investors is segregated and available in the vaults. The gold held in the vaults is also insured against any loss.
The biggest advantage of buying digital gold for the investor is being able to buy and accumulate physical gold in fractional quantities and the multiple redemption options. Then, there’s also the ease of online execution and the comfort of holding physical gold.
There is a one-time cost for storage and safety. This cost is included in the price of gold at the time of buying. “The spread between the buy and sell prices is 2.95%. This covers all costs of the transaction, including the costs of maintaining the platform, processing payments, procuring and selling physical gold, insurance and storage up to five years. Further, to support the product, we maintain adequate funds at all times to be able to purchase any gold sold to us; this cost of liquidity is also covered," said Hegde.
The lack of a regulatory mechanism for the product and its constituents is the biggest concern. In the absence of any regulation, the product can be misused when it becomes widely offered and distributed.
“Since the custody of gold is handled centrally and the digital gold provider is also committing to buy back the gold, issuers need to have substantial capital and funding. In addition to a well-capitalized issuer with sufficient liquidity, regular monitoring by an independent trustee also adds assurance," said Hegde.
“The issuer is the custodian of the investors’ gold and maintains all the investor account details," said Kishore Narne, head-currency and commodities at MOFSL, pointing to the critical role that the issuer plays in the product structure. At the moment, there is no bar set for who can offer the product. The issuer must have the financial heft to be able to continuously offer buy and sell quotes and honour them. If they are not able to do it, it will affect the liquidity that the investor has in the product.
As an investor, you do have the choice to withdraw physical gold and sell it elsewhere, but this takes time and you could miss out on a good price point to sell. Or the delay in selling the gold may mean that you do not have the funds when you need it.
There is no limit on the extent to charges and this means the price quoted can be arbitrary with no way for the investor to verify how it is determined. Also, thanks to the charges, the returns will not completely reflect the change in the gold prices over the holding period.
The trustee has an important role in vetting the quality of gold and verifying that gold sold to the investor is available in the vaults. A product offered without trustee oversight may be positioned as a move to lower the costs to the detriment of the investor.
The option of exchanging the accumulated gold for jewellery from approved jewellers may also be misused with investors getting lower quality jewellery in return for the higher quality gold that they have accumulated.
Investors are also susceptible to fraudulent practices by distributors in the absence of proper gatekeeping measures for the appointment of distributors and the definition of their role and responsibilities.
Gold exchange-traded funds (ETFs), which are regulated products, also provide the advantages that digital gold provides. However, with ETFs, investors do not have the facility to take delivery of physical gold. Also, ETFs may invest in approved financial products like derivatives and the gold monetization scheme of the Reserve Bank of India (RBI). This means the returns from gold ETFs may not completely reflect the returns from gold.
While digital gold products from MMTC-PAMP and Digital Gold India seem to tick all the right boxes, in the absence of regulatory checks and balances, it is up to you to keep track of the multiple elements of the product such as the price, quality of gold, and storage and safety measures. “There must be checks and balances from multiple entities and a well-established transaction process in place to ensure that the investor is protected," said Narne.
As the number of vendors increase and there are no mandatory disclosures that are required, it makes evaluations of the products and features that much more difficult. Investors should take some common precautions such as considering the pedigree of the issuer and the distributor and keep a close eye on any changes, such as the government’s recent announcement on MMTC.
“MMTC is a minority shareholder in MMTC-PAMP. We don’t see the announcement affecting our business or plans for future growth. The company is an independent entity with revenues of over ₹47,000 crore and PAT (profit after tax) of ₹95 crore for the year ended 31 March 2019," said Hegde.
With no regulatory grievance mechanism in place, investors have limited recourse if things go wrong.
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