4 min read.Updated: 04 Sep 2020, 09:14 AM ISTRenu Yadav
There are three companies offering digital gold 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 SafeGold brand.
Investing demand for gold has gone up manifold in recent times, as it is the best performing asset class in the past year with a return of close to 40%. Among the multiple ways available to invest in gold, one that is becoming increasingly popular is digital gold (Read here). It’s a product offered by vendors and refiners of gold through various platforms, including wallets such as Paytm, Amazon Pay and investment platforms such as Kuvera, Groww and stockbrokers.
This has given the product a reach that even some of the other most-recommended products, including sovereign gold bond and gold exchange-traded funds, may not have.
Right now, there are three companies offering digital gold—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 SafeGold brand.
Apart from the reach, the fact that investors can buy gold through this product at as low as ₹1 makes it highly attractive compared with other offerings. However, there are certain risks and costs involved in investing in digital gold, which investors should keep in mind.
Absence of regulator: The biggest risk of investing in digital gold is that there is no regulator for the product. When you buy digital gold, the producer purchases gold of equivalent amount in your name. This gold is stored in vaults of third party or in the vaults of the seller as in case of MMTC-PAMP. 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, there is no regulator to oversee if the trustee is doing the work properly. Statutory audits are conducted but auditors are appointed by digital gold providers and the report is also submitted to them.
For gold ETFs, there is the Securities and Exchange Board of India (Sebi), for gold bonds, the Reserve Bank of India (RBI) is the regulator, while in case of digital gold there is no regulator to safeguard the interest of investors.
“Regulators frame rules, put checks and balances in place, and do statutory audits, which kind of safeguards the interest of the investors. In the absence a regulator, investor interest may be compromised," said Chirag Mehta, senior fund manager-alternative investments, Quantum Mutual Fund.
In case of gold ETFs, regulatory audits are done by Sebi, and report is submitted to the regulator.
GST adds to the cost: When you buy digital gold, you need to pay 3% goods and services tax (GST) just like in case of buying physical gold.
For example, if you are buying digital gold for ₹1,000, you will get gold of only ₹970 as rest will be deducted as GST. “This is over and above the spread (the difference between the buy and sell price) charged," said Sachin Kothari, director of Augmont Gold Pvt. Ltd, a digital gold provider.
Digital gold providers charge a spread ranging between 2-3%, which provides for the expenses such as cost of storage, insurance and trustee fee. While gold ETFs also buy physical gold to back the investments but they get the credit back for GST paid.
“GST paid by gold ETFs is ploughed back in the scheme as gold ETFs being registered sellers get input credit (GST is paid by the buyer of gold) when physical gold is sold," said Mehta.
Limit on investment period: Generally, these digital gold products have a maximum holding period after which the investor has to take delivery of gold or sell it back. For example, MMTC-PAMP investors will have to mandatorily take delivery or sell the gold purchased, unlike gold ETFs where there is no such limitation. After five years, the investor will have to pay extra charges decided by MMTC-PAMP, if the delivery is not taken. One can hold Gold ETF for as long as one wants to.
Delivery and making charges apply: One of the advantages of digital gold is that it provides the option to take physical delivery of gold. One can take physical delivery at the completion of investment period or whenever one sells the gold. But remember, there are making charges as physical gold will have to be delivered in the form of coins or bars, depending on the quantity. Making charges varies depending on the design of coin. Apart from this, delivery charges will have to be paid separately.
Digital gold may look like a good option for those who want to buy physical gold for consumption, as they don’t have to worry about the storage but if you plan to invest in gold, there are better products available in the market such as sovereign gold bonds, which pay additional interest of 2.5% and gold ETFs, which are regulated by Sebi.
“We generally advise investors to invest through sovereign gold bonds as it safe, pays interest and are tax-efficient. But gold bonds may not be very liquid, so for investors who want liquidity we advise them to invest in gold ETFs," said Anil Rego, CEO, Right Horizons.
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