Plan to invest in the yellow metal? Digital gold is a cost-effective way

You can buy in small quantities over time and take a physical delivery later

After Paytm and PhonePe, now Google Pay is going to offer digital gold through its app. The payment app has partnered MMTC-PAMP India for the offering, according to reports. Digital gold is a convenient and cost-effective way to accumulate the yellow metal for those who prefer it in physical form. Other than the three apps, Motilal Oswal Financial Services and Stock Holding Corporation of India (SHCIL) also offer the product.

One of the problems in holding physical gold is the storage cost. Many prefer to keep it in lockers for safety. Public-sector banks charge upwards of Rs 800 annually for a small locker, and private banks’ charges start at Rs 3,300 for a year. Also, if you want to purchase physical gold, you have to buy a minimum of one gram.

Buy for as little as Rs 1: Most of the platforms offering digital gold have a tie-up with MMTC-PAMP. “We are distributors for the mining and refining company,” says Kishore Narne, associate director and head (commodity and currency), Motilal Oswal Financial Services. As the product belongs to MMTC-PAMP, the product features are similar. An individual can buy gold for as little as Rs 1 (0.0003 grams) on the apps. For Motilal Oswal and SHCIL the minimum transaction value is higher (Rs 1,000). Once purchased, gold is kept in insured lockers at MMTC-PAMP for up to five years.

Over time, individuals can accumulate the yellow metal by buying in small quantities and ask for delivery once they have metal equivalent to one gram or more. The price displayed is derived from the London Bullion Market Association (LBMA) and changes continuously. Once the customer selects the amount of gold he wishes to buy, the purchase must be made within five minutes after which the price changes. You can buy gold online anytime you want to.

Instead of taking physical delivery, buyers can also sell back the gold on the platform. But the price would be lower than the prevailing gold price as MMTC-PAMP doesn’t reimburse the GST and also deducts a fee for the different services it offers, according to industry officials. Say, you buy gold and immediately try to sell it. The selling price, in this case, will be 6-7 per cent lower.

Not an investment product: Digital gold works out to be a preferable option for those who like to buy physical gold. Once you decide to take delivery, you will also need to shell out making charges. Even if you add up the cost of gold, Goods and Services Tax and making charges, the price is competitive compared to purchasing gold from a jeweller or a bank. “Digital gold is not a financial product. It is a more convenient, transparent and cost-effective way to accumulate the yellow metal,” says Priya Narasimhan, director and head (bill pay, recharge, gold and revenue), PhonePe.

For those looking to invest in gold, the sovereign gold bond is the best choice. It offers annual interest during the investment tenure. 

Another option is gold exchange-traded funds, but investors have to pay charges (expense ratio), which can vary from 0.06 per cent to 2.51 per cent every year. Digital gold, however, has the best liquidity as you can sell it online any time from anywhere. 

More flexible than jewellers’ schemes: Digital gold also gives you more flexibility than the accumulation schemes that jewellers offer. 

A typical plan allows an individual to deposit a fixed amount every month for the chosen tenure. When the term ends, you can buy gold (from the same jeweller) at a value that is equivalent to the total money deposited. Some jewellers offer a discount ranging from 55 per cent to 75 per cent of the last instalment paid. The conversion is done at the gold price prevailing on maturity. Some jewellers waive making charges as a discount.

Say you deposited Rs 12,000 in equal instalments for a year. At the time of purchase, the jeweller would offer a discount of Rs 550 to Rs 750. If the customer were to start a recurring deposit and make a monthly contribution of the same amount, the bank would need to offer him an interest rate of 7.5 per cent for him to get Rs 550 at the end of one year, and 11.5 per cent for Rs 750.

While the interest rates may look attractive, the depositor gets the gold at the price prevailing on the maturity of the scheme. But if you buy digital gold, you accumulate the metal at different price points, and hence enjoy the appreciation if gold prices rise. Also, you have the flexibility to buy gold as much as you can afford every month when purchasing online — there’s no compulsion of fixed monthly payment.