People have been purchasing gold as an investment option for ages since it is often regarded as a safer category than debt and equity. Right from exchange-traded funds, and sovereign gold bonds, up to purchasing physical gold, and holding it in private or bank vaults, there exist multiple products for gold-related investments. However, among these, buying gold digitally, popularly known as digital gold, is gaining popularity lately.
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Digital gold, as the name suggests, is a product sold online that allows people to virtually retain gold without requiring a safe or bank locker. The vendor keeps an equivalent weight of real gold in a safe vault for each online purchase. And since it is sourced directly from the miners, it is the purest 24-carat gold. In this article, we will explore certain things that investors should take into account before investing in digital gold.
Choose a responsible source
The greatest threat to investors is the absence of a regulatory organization for digital gold. When one buys digital gold, the vendor purchases gold in that person’s name for an equivalent amount. This gold is kept in the vaults of the vendor or those of a third party.
Typically, a trustee is appointed to verify if the gold's quantity and purity are in line with the gold purchased by the investor. However, to monitor the performance of trustees, there is no regulatory body. Statutory audits are conducted, but the auditors are chosen by digital gold suppliers only and the report is also submitted to them. Therefore, it's crucial to pay attention to the platform through which one buys or sells digital gold.
Payment of GST
Similar to buying physical gold, an investor must pay a 3 per cent Goods and Services Tax (GST) when buying digital gold to cover costs including storage, insurance, and trustee fees. If someone spends Rs 10,000 on digital gold, for instance, they will only receive Rs 9,700 worth of gold because the remaining INR will be deducted as GST.
Know the spread
The "spread" refers to the price difference between the purchase and sale. This spread usually ranges from 2 to 3 per cent for digital gold as it covers 1 to 2 per cent of bank/credit card transaction charges. Moreover, when customers sell back their gold, the 3 percent GST that was charged on it is lost because only VAT-registered businesses are eligible to claim the GST.
Investment time limit
Digital gold investments are only allowed to be held for a certain amount of time after which the investor must either receive delivery of the gold or sell it further. Investors are required to pay additional fees if the delivery is not taken by the deadline. They can transact with a tiny amount every few months to keep their digital gold account active. Therefore, when the due date approaches, one should decide on the format in which they want to redeem their digital gold.
To put it in a nutshell, investors must be mindful of the aforementioned points to embark on a fruitful investment journey. This will help people choose wise investments and make sure they are informed of the risks and challenges involved in purchasing digital gold.
The author, Sidharth V, is CRO at KreditBee. The views expressed are personal
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