Mr. Mahendra Luniya is a founder and CEO of Vighnaharta Gold Limited. He is an expert in the Financial sector, with over 20 years of experience. He is an expert on the market and is always up to date with the latest market trends. He has also done a lot of market research and analysis, which led him to the formation of Vighnaharta Gold which is into Digital Gold.
Gold, for centuries, has been a part of portfolios of investors around the world. It has gained the title of a safe haven because of its ability of beating inflation. Now let’s understand the new way of investing in the precious metal to get a lot more advantages out of it.
What is Digital Gold and what are the various Digital gold products?
Digital gold products are products backed by gold as an underlying and can be traded and stored online. Just as the world is going digital and online, so are gold products. But is the revolution worth the change in the investment style? We will deep dive into it in the later part of the article. First let’s understand the different types of digital gold products.
- Sovereign Gold Bonds (SGB): – SGBs were first issued by RBI in 2015 to encourage digital gold investments across the nation. SGBs are gold bonds issued by RBI and are backed directly by the central government, making them highly secure. Every unit of the bond represents one gram of pure gold. It can be bought directly form the RBI (by investing in an open tranche issue) or from the recognized stock exchanges (where they are traded). These bonds can be stored in physical forms (SGB certificates) or in the digital form through a de-mat account. These bonds come with an interest rate of 2.5% per annum, which is credited to the bond holder’s account on a semi-annual basis. Yes, you will get interest on the gold you hold!!
- Gold Exchange traded funds: – An exchange traded fund, basically is a mutual fund whose units can be traded on the stock exchanges. Gold ETF is an ETF which invests in gold. These are issued by mutual fund houses like Axis Gold ETF, Nippon India Gold ETF, etc. This is a way through which gold can be bought in small quantities, as the per unit value of some Gold ETFs start from as low as Rs 45. These ETF scripts are regulated by SEBI.
- Gold wallet: – Gold wallets are very similar to cash wallets, with the only difference being that in gold wallets we store gold. Here the customers can buy gold amounting to as low as Rs. 1. The gold is stored in digital gold wallets and the value increases or decreases according to the change in the value of gold. Once the customers buy gold the wallet, the companies store the same amount of gold with depositories like MMTC-PAMT. Here the gold can be bought or sold any time from the mobile application.
- Multi Commodity Exchange (MCX): – MCX is a platform where traders can trade in various commodities like Gold, silver, wheat, etc. Here one can trade in gold options and futures. This market is for speculators and hedgers. Participants can take trade in various quantities ranging from 1gm to 1 kg.
Advantages of investing in Digital Gold: Gold works as a hedge against inflation, but in addition to that, what does the digital product has to offer? Let’s figure it out:
- Purity: – The purity of physical gold is always a point of doubt since that depends a lot on the location from where you buy it, whereas the purity of digital gold is well defined and maintained in most digital gold products. Hence, the purity is never a concern in digital products which otherwise was a major drawback of physical gold investment.
- Liquidity: – All digital gold products can be bought and sold online making them highly liquid as compared to the physical sale of the commodity.
- Interest: – SGBs give an option to earn interest on the investment which would otherwise end up in lockers and would even attract locker rents. This interest is in addition to the price increments that gold will yield over time.
- Budget friendly: – Buying Rs.1 gold was not a feasible option earlier, whereas today, one can start investing in the yellow metals even with low capital requirements.
- Security and locker charges: – Physical gold stored at home could generate a security threat and to avoid it, we end up paying locker rents, the digital forms of the same gold will save all such costs, thus increasing the return earned.
- Making charges and GST: – Buying even the very raw form of physical gold attracts some making charges and 3% GST. These costs only end up reducing the overall returns earned, this cost can be saved if we shift the investment to the digital options.
- Melting charges: – This is the difference between the buying and selling prices of physical gold. This generally range between 3-5%, which is actually a loss for the customer. There is no such cost involved in digital gold making it all the more transparent.
Areas to be concerned about: Just as every other investment, gold too has some areas that need our second thoughts. These are:
- Sentimental value: We usually buy gold not just for investment but also for its use as jewellery. It is very important to understand that the two utilities can be segregated and should be seen as 2 different things altogether. Just as people have started realizing that insurance and investment are to be seen as two different products for its best result, so is the case with gold. All the above advantages focus on the investment in the metal and not on the ornamental use of the same.
- Price fluctuations: Gold as differentiated from FDs doesn’t promise fixed returns, but the returns over the decades have been sufficient to beat inflation, thus the focus here is likely good returns and not fixed returns.
Thus, when evaluating the investment options under gold, we should definitely take into consideration the digital options and modernize our outlook towards gold investments.