Though a sharp run in gold prices this year has pushed many to consider investment in the precious metal and investors owing to the convenience tied to investment via the digital route and experts advice on refraining investment via the physical route are increasingly opting for it. Here is why you should be cautious while buying gold through the digital channel.
First we will begin with the basics of buying digital gold and what is it? And later as to why investment in gold via this route is not risk-free.
What is Digital Gold?
In simple terms digital gold is buying physical gold via the online channel and the storage of the same is managed by the third-party.
Who is selling or service providers of digital gold in India?
Various fintech or investment companies (Groww, Kuvera) and digital wallets are offering to purchase digital gold for a minimum of 1gm or in rupee terms for as less as Rs. 1 whereby a platform to offer digital gold is offered to leading refiners as well as gold trading companies that include
1. MMTC-PAMP India Pvt. Ltd
2. Digital Gold India Pvt. Ltd under its SafeGold brand
3. Augmont Gold
Now despite the easy route and the fungibility extended in buying the precious metal this way, here is what one needs to be mindful of:
1. No regulatory infra:
Even though the World Gold Council stressed on the need to have in place standards that assure of investors' safety and even came up with the guidelines, the Indian market still lacks the regulation norms for it.
Now to understand how buying digital gold is brought about:
There are 3 stakeholders involved:
-Producer of gold
-Third-party storing physical gold on behalf of the customers which can even be by the seller of gold as in the case of MMTC-PAMP
-Trustees or insurer who oversees whether the quantity and quality (purity) are as per customers specification. But then these are just best governance practices that are not mandated for these players who operate in the segment.
There are audits being carried out but for the same there is no market watchdog as is the case with gold ETFs where SEBI oversees everything and likewise for SGB there is RBI which issues gold bonds on behalf of the government.
At best these companies selling gold are covered under the Shop and establishment Act and hence with no recourse to customer in case of default.
2. Constraints in respect of timeline to remain invested in digital gold:
At some of the places such as MMTC-PAMP, investors can remain invested in the product for up to some specified timeline after which they need to either sell the units or take physical delivery. So, ideally digital gold shall serve best for consumers of gold rather than one's who want to invest in the metal for likely capital gains.
And if held for a defined period then there can be even imposition of a higher cost as for MMTC-PAMP.
3. GST implications similar to physical gold:
Over and above the spread of between 2-3%, cost of buying digital gold also comprises 3 percent GST. But here for the investment purpose, buying gold ETFs makes more sense as even though physical gold is bought as an underlying security, for the GST paid mutual funds get credit back.
4. Making charges apply when redeeming investment via delivery in physical form:
This form of investment into gold allows taking delivery when one decides to sell or take delivery but based on the quantity purchased the delivery shall be as coins or bar and that would entail a cost.
At some of the places, even storage or holding charges also apply like for when buying digital gold via SafeGold from PhonePe.
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