Is investing in digital gold a better option than the real thing?

By Shipra Singh
iStock

Digital gold is the flavour of the season. After fintech companies, jewellers such as Tanishq and Kalyan Jewellers are also lining up to woo younger, first-time customers into purchasing the yellow metal in a convenient manner through the digital gold route.

Digital gold saw a huge increase in demand last year during the covid lockdown.

As per Gaurav Mathur, MD, SafeGold, there’s been a 150% increase in the amount of gold that is stored in vaults in the past one year, which indicates the growing popularity of the product. Heightened interest among investors can mainly be attributed to the fact that through this route one can buy and sell gold in fractions, with the minimum amount starting at just 1.

But is digital gold a financial product? How does it compare to gold exchange-traded funds (ETFs)? Is it safe to invest in? Mint gives you all the answers.

Is digital gold a financial product?

Digital gold is a tool to purchase and sell pure gold in its digital form at the prevailing market prices. It is neither a deposit, nor a financial product. The gold that you buy is backed by physical gold which is stored under your name in a certified vault. You can convert your digital gold holding into coins, bars and jewellery anytime you want and get it delivered to you. You just need to pay making charges.

Three companies offer digital gold in India—Augmont Gold, MMTC-PAMP and SafeGold, which is the retail brand of Digital Gold India. Portals such as Paytm, Groww, Gpay along with jewellers that offer digital gold as an investment option on their platforms have essentially tied up with these entities. Only the three stated companies are legally allowed to sell gold and purchase it back from the customer on their platforms.

Is it an investment option?

Since digital gold lets you own the physical metal, it does act as an investment option. However, it does not assure any return or interest, just as owning physical gold. You can either redeem your accumulated holding in the form of coins, bars or jewellery or you can sell it back to the seller at the prevailing gold rate. The gold rate displayed on the platform on which you hold digital gold is the rate per gram of pure gold (999.9 or 24k).

The key difference between buying physical gold (coins, bars) directly and through the digital gold option is that you need not worry about security and storage of the latter.

The seller of digital gold stores it at a vault free of cost as a custodian for five years. Beyond this, the customer will have to pay a storage fee to the custodian if they don’t sell or redeem their holding.

How does it compare to gold ETFs and funds?

Investing in gold in electronic format through ETFs and gold funds is considered a better investment option over buying physical gold as the latter entails high costs in the form of making charges, which are deducted at the time of selling the gold product. But, how does digital gold compare to paper gold options?

A gold ETF functions as a passive investment tool based on gold rates, which is traded on the stock exchanges. This means the investor needs a demat account, which is not required for buying or selling digital gold. Both the options are backed by physical gold, but selling a gold ETF gives only cash equivalent. In terms of cost, buying digital gold attracts 3% GST on each purchase, whereas ETFs and funds involve annual charges of 0.5-1%.

“If one is looking at gold purely as a financial investment to include in their portfolio, gold ETFs or funds make more sense," said Mathur. “If an investor plans to buy and sell purely as financial speculation for under three years, she may earn a higher return on a gold fund or ETF." Digital gold works best for those who want flexibility to buy and sell gold virtually and expect to redeem gold holdings in physical form at some point in the future. “It makes for an excellent gifting option," said Mathur.

Also, though not regulated, digital gold is safe as an RBI-regulated trustee backs the gold, and the vaults are insured against theft and natural disasters.


What is inkl?

Important stories

See news based on value, not advertising potential. Get the latest news from around the world.

Trusted newsrooms

We bring you reliable news from the world’s most experienced journalists in the most trusted newsrooms.

Ad-free reading

Read without interruptions, distractions or intrusions of privacy.