Why it makes sense to invest in digital gold schemes this festival season

The first day of Diwali is celebrated as Dhanteras in many parts of the country. It is considered auspicious to buy gold on this day, and there is invariably a rush at jewellery stores. What if you had bought gold worth Rs 1 lakh on Dhanteras in 2016. What kind of return will you get if you want to sell that gold now?While the value of gold has appreciated by approximately 50% in the last five years, your return on investment depends upon how you invested in gold — jewellery (or coins), gold funds, or gold bonds. Based on that, you could see hugely varying returns — from 30% to more than 60%. !function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r India’s love affair with gold is no secret — with import volumes of 800-900 tonnes a year, India is the largest importer of gold in the world. No marriage in the country is complete without purchasing gold jewellery. In addition, in the Hindu calendar, there are several festive days such as Gudi Padwa, Akshay Tritiya and Dhanteras when it is considered auspicious to buy gold. Gold as a retail investment asset has historically delivered 8-9% returns per annum, and is regarded as a hedge against inflation and equity markets. Given the deep-rooted cultural attachment and solid returns performance, gold is an essential part of any retail investment portfolio. The trouble with jewelleryTraditionally, people looking to invest money in gold would typically buy jewellery. This is even more true for rural India, where the level of trust on equity or mutual funds is much lower than in the urban areas. The main drawback of buying jewellery as an investment is the high proportion of making charges. This, along with design charges, can vary from 6% to 20% of the gold value, depending on whether it is a simple gold coin or a beautiful wedding jewellery set. In addition, purchase of gold incurs a 3% GST charge. So if your wife tells you tomorrow that you should buy gold jewellery for investment, you can call her bluff because you are losing more than 16% upfront on average. Storage of jewellery is an additional cost — typically you would hire a locker in a bank to prevent risk of theft, which could cost you Rs 1,000-10,000 per annum, depending on its size. Therefore, buying jewellery is actually part-consumption and part-investment, and can be rationalised only if you consider the intangible benefits of the pride and pleasure you experience while flaunting the jewellery. The higher-return optionsIf you are only interested in the tangible benefits i.e. the monetary returns you can get from investing in gold, there are a host of other digital alternatives available today that do not require you to possess physical gold. This way you not only save on the making charges but also the associated storage costs. There are several options available, such as buying digital gold on a web or mobile platform, which is held in a secure locker by a private company, or buying Sovereign Gold Bonds. Another option is to buy a Gold Exchange Traded Fund or Gold Mutual Fund from SEBI-regulated Asset Management Companies (AMCs). Each of these options come with its own sets of benefits and drawbacks. !function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r Digital goldThis option is fast becoming ubiquitous on all consumer-facing mobile apps and web platforms. It started with PayTM and Phone Pe in 2017, then quickly extended to many other payment platforms like Google Pay, Mobikwik, FreeCharge and Bharat Pe. As per estimates from World Gold Council, digital gold investment in India in 2020 was around 4-5 tonnes, which is about 3% of the total retail gold investment in the country. This is expected to be 40-50% higher in 2021. Such has been the popularity of digital gold that even “True-Yellow” jewellery companies like Tanishq, Kalyan Jewellers and PC Jewellers have started offering this option. All platforms selling digital gold are doing so in partnership with one of the following three entities — MMTC-PAMP, Augmont or SafeGold. These companies procure physical gold equivalent to the value of digital gold and keep it in a vault in your name.The pros and cons of digital goldThe main advantage of investing in digital gold is that you can invest in very low amounts, starting from Re 1, and you can buy or sell gold instantly through your mobile app or web platform. You can also take physical delivery of the gold when you want it.However, there is a hidden cost involved. Platforms offering digital gold will typically charge 3-4% spread between Buy and Sell prices to cover for their cost of technology, storage and handling of the gold. In addition, you will still incur 3% GST loss, as the vault provider is actually buying the physical gold in your name and storing it for you. medium nocaption86844261Another key risk associated with digital gold is that there is no regulatory entity like SEBI or RBI to safeguard the interests of the end-investors. While there are trustees appointed to ensure that the purity and quantity of gold is maintained in line with the gold purchased by investors, there is no government regulator to check that the trustees are doing their work properly. Having said that, this is a very popular option among retail investors because of the ease of investment experience. If you are planning to invest small amounts and take delivery of the gold sometime in future, this could be the best choice for you.Gold funds are a lucrative optionIf you are not looking to wear jewellery or use physical gold in the future, then a better option than digital gold from a monetary perspective is to invest in Gold Exchange Traded Funds (ETFs). These are funds managed by AMCs that invest in gold of 99.5% purity and emulate the returns on gold. These gold ETFs have been in existence since March 2007 and most leading banks offer them, such as SBI Gold ETF, ICICI Prudential Gold ETF, HDFC Gold ETF, Kotak Gold ETF etc. ETFs are very liquid, they are maintained in a demat account and can be bought and sold in the market. Moreover, a loan can also be taken against the ETF. medium nocaption86844262The minimum amount you need to invest in a gold ETF is 1 gram and there is no GST loss involved. Gold ETFs will typically involve a 0.5-1% annual expense ratio, which is incurred by the AMC in managing the portfolio. A gold mutual fund is nothing but a basket of gold ETFs. Gold mutual funds have similar returns and benefits as ETFs, with the expense ratio being slightly higher. The minimum amount for investment in this option is Rs 1,000. Gold ETFs and mutual funds are regulated by SEBI, hence consumer interests are protected by the government. Sovereign Gold BondsIf you have a longer investment horizon and seek even better returns, you can opt for Sovereign Gold Bonds (SGBs) issued by the Reserve Bank of India (RBI). SGBs were created by the apex bank in 2015 to cater to the increasing demand for retail investment in gold. SGBs emulate the returns on pure gold and provide an additional 2.5% interest income per annum. There are no hidden costs of making, storage or maintenance involved in investing in SGBs. This makes it an extremely attractive option for retail investment, especially if you are looking at a longer-term investment horizon. As a bonus if you complete the entire eight years of the SGB tenure, Capital Gains Tax will be waived entirely. medium86843205The key disadvantage of SGBs lies in their liquidity. You have to stay invested for a period of at least five years before you can redeem SGBs. While you can sell the bonds prematurely in the stock market, premature bonds sell at a discount (3-5%) in the market. To conclude, there are many ways of joining the retail gold rush. Knowing the rules of the game is key to surviving and coming out on top. While some of these gold investment options may seem attractive on the outside, as the saying goes, remember that “all that glitters is not gold”.Ayush Mittal is a champion of the transformative potential of technology and artificial intelligence on consumer finance.Read also: 86197252