Due Diligence. Why investing via wallets in gold is fraught with risks

Are you in a rush to buy gold, given the breathtaking rally of the metal? It is understandable that as an investor hunting for returns, you don’t want to miss the bus. In this article, we make compare different modes of digital investment in gold based on safety and returns.

There are broadly three ways to invest in gold digitally — buying through mobile wallet companies such as Paytm, PhonePe or GooglePay or through digital platforms of players such as Motilal Oswal and HDFC securities; buying through mutual funds via listed gold exchange-traded funds (ETFs); and buying sovereign gold bonds (SGBs) of the RBI.

Gold ETFs

Gold ETFs are safe and transparent instruments. There are many checks and balances in place to ensure that the investor is not cheated.

For every unit of the instrument you buy, there is physical gold bought by the AMC (asset management company) and this is checked by a SEBI-registered custodian (for most gold ETFs, it is Deutsche Bank).

The presence of a custodian in gold ETFs of mutual funds, besides a trustee, adds a layer of safety for investors.

The custodian is responsible for safekeeping of gold, and is obliged to keep a check on gold holdings’ net inflows and outflows.

Further, in the case of gold ETFs, all gold is stored with an independent vaulting agency — mostly, Brink’s India — where records are maintained on a daily basis for bar number, purity certificate, gold movement, etc.

Also, unlike issuers of digital gold, the MFs issuing gold ETFs are required to give periodic disclosures on fund holdings through a fact sheet at the end of every month to SEBI. Also, there is auditing of the gold-holding of the MF by internal as we all as SEBI auditors.

Charges: For an investor, gold ETFs may work out cheaper than digital gold of mobile wallets. Investors can buy and sell gold ETFs without GST. However, note that there is a fund management cost and brokerage.

Sovereign gold bonds

SGBs score the highest on safety among the digital gold investments.

It is issued by the Reserve Bank of India (in denominations of one gram of gold and in multiples thereof) and comes with sovereign guarantee. It is available in demat form.

Further, there is an added benefit of 2.5 per cent per annum interest, that boosts returns for the investor.

Also, if you hold it till maturity, that is, eight years, there is no tax on the capital gains from gold price increase. The bonds is issued and redeemed at the market price of gold.

Charges: There is no extra cost on SGBs but for what you pay the broker (or other intermediaries) to buy the bond.

There is discount available for investors buying online at the time of the primary issue by the RBI.

Digital platforms

MMTC-PAMP — a joint venture between MMTC, a Government of India company that is into gold trading, and PAMP, a Switzerland-based gold refiner — sells gold as coins/bars in different denominations through retail outlets and also digitally. You can buy the gold of MMTC-PAMP through players including Paytm, PhonePe, Google Pay, or through stock brokers such as HDFC securities or Motilal Oswal, digitally. While the purity of gold of MMTC-PAMP is assured (it is LBMA ( London Bullion Market Association)-certified for 999.9 purity), the lack of regulation in the space poses a risk.

There is no watchdog governing this space, like the Securities Exchange Board of India that governs gold ETFs or the Reserve Bank of India that oversees sovereign gold bonds.

In September 2019, there was news of the Central government considering closing of some operations of MMTC.

MMTC-PAMP tried to calm the nerves of its investors by saying that MMTC was only a minority shareholder in the entity and that the joint venture will continue unaffected by the government’s decision.

It added that IDBI Security is its trustee and that customers’ gold is safe with it.

But this may have to be taken with a pinch of salt as there is no regulator and there is no independent auditing of the holdings.

For people wanting to buy physical gold digitally, another option is using SafeGold, which is offered through mobile wallets, including PhonePe. Again, this is an unregulated entity and risks are the same as investing through MMTC-PAMP.

Besides, the gold you buy here is a tad lower in purity — 995 fineness against 999.9 offi MMTC-PAMP gold.

The point in which SafeGold scores is that it stores gold in Brink’s India vaults unlike MMTC-PAMP, which keeps customers’ precious metal in its own vaults.

Note that while the digital platforms allow you to sell the gold in your account without having to redeem it physically, you cannot sell gold on the same day you buy it.

Also, there is a 2-3 per cent difference between the buy and sell prices because of the charges levied by the distributor/gold-issuer. Further, with MMTC-PAMP, you can keep gold only for five years, and with SafeGold, it is two years from the date of purchase.

Charges: The cost of buying gold through the digital platforms is higher. For instance, on August 12, the rate on Paytm for buying 1 gram of 24k gold was ₹5,423.32, while gold ETFs were quoting at ₹5,193/gram (the LBMA spot price). Besides, note that each time you buy/sell gold via digital platforms, you will be charged 3 per cent GST.

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