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It's the final week of Second lockdown in India due to COVID-19 and I was busy with my newly found passion – like any other home quarantined person – cooking. This time it was my favourite teatime chaat – the Pav Bhaji. Having done the Lip-Smacking Dish , I notice I missed out topping the Bhaji with chopped onions for embellishment – just to get that perfect status worthy pic. Unfortunately, I had no more onions. So, I had to reach out to my always caring neighbour – Lalitha Aunty. But I realized it was 4:30 in the evening and her meeting would be on with some heated conversation along with her peers!!!!

Lalitha Aunty, Lakshmi Aunty and Nakshatra Aunty are friends from our housing community. Every evening, they have a tea meeting, wherein they discuss all that is in news headlines. With the outset of Corona, they now hold their meetings on digital platforms! And yeah, I cracked in to one such meeting.

The topic of discussion was Gold. Since Akshaya Tritiya is just around the corner, indeed the topic is worthy deliberating. I guessed the whole discussion would be ‘mourning the lost chance of purchasing gold in the name of prosperity' but to my surprise I guessed it completely wrong. They were finalising the amount of money each one is planning to spend on Gold! Yes, you heard it right! Even Corona failed to stop Indian ladies from purchasing Gold!

(While Lalitha Aunty took 2 Onions from her well organized kitchen, I could not stop engaging myself into the conversation)

Me: So, celebrating Akshaya Tritiya this time too?

Lalitha Aunty: Of course. We can never miss out on that dear!

Me: How come you purchase gold when all shops are shut down?

Lakshmi Aunty: We are planning to buy it online

Me: Flipkart & Amazon started delivering gold also uh? Free delivery?

Nakshatra Aunty: No beta. We are exploring few routes like Gold ETFs and Digital gold

Me: Wait! I guess I need some extra input on this!!!!

All that is Gold need not Glitter

(Lalitha Aunty offered me a cup of ginger tea, which meant I am also a participant in the meeting now)

Lalitha Aunty: So, let me start with Gold Exchange Traded Funds or ETFs

Gold Exchange Traded Funds or Gold ETFs are open-ended mutual fund schemes based on the movement of price of gold. By an open-ended mutual fund, it means the shares can be bought or sold at any time at the Net Asset Value (NAV). These ETFs consist of only one principal asset - gold that is these funds primarily invest in gold. One Gold ETF unit is equal to 1 gram of gold and is backed by 99.5% pure physical gold bars.

Like the stock of any other company, Gold ETFs are also listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE). The Gold ETF prices are listed on the website of BSE/NSE and can be bought or sold continuously at market prices anytime through a stockbroker. Unlike gold jewellery, Gold ETF can be bought and sold at the same price across the country.

Though these funds are based on gold, investing in Gold ETF does not mean owning any gold. Even when you redeem a gold ETF, you do not receive gold in any form. Instead, you as an investor will receive the cash equivalent.

Have a look at major Gold ETFs listed and traded currently.

Me: Why Gold ETF and not a gold chain?

Lakshmi Aunty: Storing physical gold is risky and costly too. Moreover, purity is a concern when buying gold. And a lot much of money goes into making charges. Gold ETF's enable investment in gold, and I can avail tax benefits too. Where the units are held for up to three years, then capital gains will be classified as short-term. On the other hand, if the time period exceeds three years, then these gains will be treated as long-term and taxed only at 20 per cent plus cess with indexation benefits.

The purity of the gold is guaranteed, and each unit is backed by physical gold of high purity. Since these funds are directly linked to gold pricing, there is a complete transparency on the holdings of a Gold ETF. Also, today ETF's are accepted as collateral for loans and there is no entry and exit load.

There is no premium or making charge, so we stand to save money if our investment is substantial. Moreover, one can purchase as low as one unit (which is 1 gram).

Me: So, all is well in Gold ETF?

Nakshatra: Not exactly! No doubt that gold ETFs have gained a lot of popularity and have an edge over the physical gold, but you need to consider a few more points. One cannot ignore the demat account cost, annual maintenance cost and also a small asset management fee that is charged by the fund house, which makes the return appear slightly lesser than the actual increase in gold price. Before jumping into investing in gold ETF it is important to check the performance of the ETF. Some ETFs are illiquid, which ultimately impacts their buying and selling flexibility. Hence, when investing in Gold ETFs it is important to stick to funds that are liquid without ignoring the market risks attached to them.

(Grabbing another cup of ginger tea and 2 Marie biscuits, I was ready with the next question for the ladies)

Me: So, tell me about Digital Gold?

Lalitha Aunty: Digital gold simply means buying gold through digital platforms. Several wallet providers like Paytm, PhonePe have started offering digital gold. Google Pay, Google's mobile payment app, is one of the newest payment players to join the digital gold rush. Not to miss out banks like HDFC and ICICI offering options to buy gold online.

Digital gold is made available on these platforms by vendors or producers such as MMTC-PAMP India Pvt Ltd and Digital Gold India Pvt. Ltd. MMTC-PAMP is a joint venture between Metals and Minerals Trading Corp. (MMTC), a government of India initiative, and Switzerland-based MKS PAMP. Digital Gold India offers SafeGold, a product backed by private equity (PE) funds; the World Gold Council, too, has a minority stake in the company.  Google Pay, Paytm and Motilal Oswal Investment Services collaborate with MMTC – PAMP whereas ICICI Bank, Paisabazaar distribute SafeGold.

Me: What about the quantity and quality?

Lakshmi Aunty: The prices are decided by the issuers or vendors and are based on the international price of gold. These rates differ based on market conditions. Investment in digital gold can be as low as Rs. 1 and maximum amount that can be invested depends on the issuer or distributor. Eg: In Paytm, the minimum value to buy is Rs. 1 whereas the minimum investment amount in Paisabazaar is Rs. 100.

The purity of gold is assured by the respective issuers. MMTC-PAMP offers 24-carat gold of 99.9% purity while SafeGold is 24-carat gold of 99.5% purity.

Me: Where does my gold go? When will I get it?

Nakshatra Aunty: The physical gold you buy is held in the custody of the issuer till such time that you choose to sell or take delivery of gold. When bought from MMTC-PAMP, the gold is stored in vaults for five years without any storage charges. Similarly, SafeGold can be stored without charges for the first two years and can be held for a maximum of 7 years. At the end of such maximum period, you are required to either convert it into gold coins or sell it.

You can redeem the gold by either selling it back to the vendor at applicable prices or taking the delivery of physical gold. To take the delivery, the accumulated gold must be at least 1gm in the case of MMTC-PAMP and 0.5gm in the case of SafeGold. Minting and delivery require certain charges to be borne by the investor. Investors are also given the option to redeem the accumulated gold against jewellery purchased from approved jewellers.

Me: I think this is going to make gold buying a lot cooler! Right?

Lakshmi Aunty: The biggest advantage of buying digital gold is that the investors can buy and accumulate physical gold in fractional quantities, thus making it accessible to small and medium sized investors. The online execution of the entire process of buying and selling makes it easy and also gives the comfort of holding physical gold. When choosing to opt out, there are multiple redemption options making it attractive.

One major concern of digital gold is the absence of a regulatory mechanism for the product and its constituents. Lack of any regulation makes the product vulnerable to misuse when it becomes widely offered and distributed. When the custody of gold is handled centrally and the digital gold provider also commits to buy back the gold, it is pertinent that issuers need to have substantial capital and funding. A well-capitalized issuer with sufficient liquidity, along with regular monitoring by an independent trustee also adds assurance.

With number of vendors on a rise and no requirement of mandatory disclosures it calls into question the authenticity of evaluation of the product and its features. Investors should take some common precautions such as considering the reliability of the issuer and the distributor and keep a close eye on any changes, issued from the government.

Me: So Gold ETFs or Digital gold?

 

Lalitha Aunty: Gold ETFs invest in approved financial products like derivatives and the gold monetization scheme of the Reserve Bank of India (RBI) but do not provide the option to take delivery of physical gold. On the other hand, digital gold products facilitate physical delivery of gold but without the presence of sufficient regulatory checks and balances.

It is up to you to keep track of the multiple factors of the product such as the price, quality of gold, storage, liquidity with safety and regulatory measures.

 

Two cups of ginger tea down, the conversation had taken me completely by surprise. The ladies introduced a new world of buying gold online to me. Gold is a lucrative investment option and is a well-known hedge against inflation. Going forward, Gold is not only chains or bangles, but investments, profits and returns. Maybe this realisation paves way for gold occupying greater proportions in the portfolio of securities of investors.

By thanking them for their generosity and wishing them the prosperity of Akshaya Trithiya, I headed back home with onions and wisdom of a new era for Gold transactions.

Though my Pav Bhaji seems to have lost its charm, our love for gold never loses its!

Perhaps to be gold, it need not always glitter.

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