The concept of investing in the digital form of a product that India has been physically and emotionally attached to is slowly emerging as the country embraces financial literacy and the need to invest in various asset classes.
Physical gold, a preferred traditional form of gold investment in India, is now being considered for investment in the digital format. If you are looking to buy and sell gold digitally, here are your options and how to invest in the digital form of gold.
What does it mean to buy gold digitally?
Digital gold is a method by which you can invest in the yellow metal in small fractions anytime and anywhere with the convenience of digital access to the commodity.
The different forms of investing in digital gold include buying:
Sovereign Gold Bonds (SGB)
SGBs are debt instruments offered by India’s central banking authority, the Reserve Bank of India (RBI), where investors can buy gold in amounts as small as 1 gram. The trade is carried out through an investment in a series that the RBI opens to investors for predefined periods of time.
SGB series are announced and open to investors in the same way that an initial public offering or public listing of a company is made for a predefined period to subscribe for its shares.
Gold Exchange Traded Funds (ETFs)
Gold ETFs are exchange traded funds and are similar to equity mutual funds. Each unit of a gold ETF represents one gram of gold and is 99.5% purity. This physical gold is stored with custodians and acts as the underlying through which ETF units derive value. There are various funds that sell gold ETFs and investors have a wide variety of choices.
MCX Gold contracts
MCX gold contracts provide a method for trading the metal through the recognized commodity exchange in India, the Multi Commodity Exchange or the MCX. MCX gold contracts are basically derivative futures and options contracts that provide investors with the ability to hedge, speculate and trade the metal for a short-term period. These are suitable for more experienced investors and are ideally traded under watch.
Gold is one of the different metals traded on the MCX. Gold contracts allow the investor to trade the commodity for a minimum quantity of 1 gram. “Gold”, “mini-gold”, “gold guinea” and “gold petal” are some of the specified quantity products available on the MCX for investors.
Digital Gold Organizations
Organizations that allow gold to be traded in a digital format such as Google Pay, PhonePe, and Paytm offer a web platform or mobile app that supports buying and selling digital gold for an amount of investment as low as 1 INR. The underlying physical gold is stored with insured depositories and locker facilities maintained by vendors such as SafeGold and MMTC-PAMP India. For example, Google Pay stores its gold with MMTC-PAMP.
Benefits of investing in gold digitally
Purity: When we buy gold digitally, its purity is assured because digital gold is traded only as 24 karat which is the highest purity for the metal. This is not the case when you invest in physical gold, as the possibility of irregularities exists due to fraudulent practices such as gold plating ornaments to describe the gold as pure while it is is not.
Security: The digital form of gold is kept in a demat account making it less prone to any form of theft as opposed to physical gold which carries the risk of being stolen or lost. Storing gold in a demat account is also quite cheaper than storing physical gold which requires a vault or vault and incurs locker fees as well as insurance costs.
Liquidity: Digital gold can be bought and sold in a split second, anytime, anywhere. This convenience is not available in the case of physical gold which must be purchased from reliable sellers who sell government hallmarked jewelry.
Normal wear: Physical gold is a product that can be used in everyday life and therefore, can be subject to wear and tear. In the case of digital gold, the gold is secured in a digital format and does not suffer any wear and tear.
Government supported and transparent: Sovereign Gold Bonds and Gold ETFs are traded on exchanges, which makes them very transparent to invest. In the case of Sovereign Gold Bonds, the government offers a sovereign guarantee that makes them risk free or with a minimum risk of default.
Additional advantage over bonds: Gold bonds have more advantages over other bonds such as corporate bonds or government bonds because only interest can be earned on the investment made in other bonds. While in gold bonds, the interest as well as the appreciation of the gold rate can be appreciated. When gold is purchased in digital form, the increase in the value of the gold along with the interest is passed on to the investor.
Disadvantage: Digital gold does not have the emotional touch that a physical investment in gold brings to the investor. This attachment attracts investors to gold in traditional communities such as those in India who perceive the purchase of gold as an important step in their financial planning, indicating strong financial health.
Steps to Investing in Gold Digitally
To invest in SGBs and Gold ETFs:
- An investor must have a demat account linked to his PAN card and to his bank account.
- Once the demat account is opened, they can purchase a selection of gold products from recognized stock exchanges or directly through the mutual fund for gold ETFs and through the SGB series advertised by the RBI for SGBs.
- To sell their gold digitally, investors can sell it on the secondary market, i.e. the stock exchanges or it can be held to maturity and then redeemed.
- Various organizations also offer the option to buy digital gold from 1 INR.
- Before purchasing, the Know Your Customer (KYC) documents must be complete and verified. The modes available for KYC demat include e-KYC and KYC video which make the process of opening an account to buy gold digitally quick and easy. KYC typically requires the individual’s PAN and Aadhar card details.
Risks of buying gold digitally
- The main risk associated with any investment is that the value of the investment usually deteriorates leading to negative growth results. Buying gold digitally also carries this risk.
- In the case of gold in digital form, the regulatory framework for regulating transactions in the metal is not yet clearly defined in India. This is an important potential risk to be taken into account. Until the necessary guidelines to regulate the digital buying and selling of gold are notified by the government, investors must do their due diligence on the integrity and business model of the digital gold provider.
- If trustees are appointed by companies supplying digital gold, the credibility and reputation of the storage agency where the gold is stored and the adequacy of the insurance should be assessed to avoid any risk.
- Hidden charges are another gray area. Before investing in the instrument, cross-check all or part of the costs involved. Otherwise, they will negatively affect the overall returns of the investment.
- Cyber theft poses a major risk that accompanies any online transaction. The purchase of the digital form of the product is also subject to this.
Where to buy digital gold in India?
To buy gold in digital form, various direct options available are:
- SGBs can be purchased from the RBI when they advertise the series of these bond offerings.
- Gold ETFs can be purchased from mutual funds that offer the product.
- MCX Gold Contracts are products offered by MCX and can be purchased directly from them.
- The various products offered by other organizations can be purchased from their websites or mobile apps, which must be KYC verified.
The indirect option is to trade in the secondary market i.e. buy from exchanges such as the Bombay Stock Exchange and the National Stock Exchange which offer buyers and sellers a trading venue where they act as as mediators.
At the end of the line
In the fiscal year 21-22 budget, the Indian federal government clarified that the market regulator SEBI will work as the gold trading regulator. This move is expected to boost confidence across the commodity market, including gold traders and retail buyers.
Just as stocks have now been dematerialized, the process of buying and selling gold is streamlined and with SEBI acting as a regulator, it has resulted in a smoother process of delivering the gold product within one trading day. and two more days, commonly referred to as T +2 days.
For the concept of buying and selling digital gold to be more widely accepted, investors need to be more financially aware and open to new investment products that can improve their long-term return prospects. .