Gold and Indians have an extraordinary relationship. Any festival or occasion is incomplete without the glitter of gold. But the youth today is increasingly moving away from the traditional mode of gold investment and preferring options like Sovereign Gold Bonds and Digital gold due to their multiple benefits over investing in gold the conventional way. Now as per the latest addition of benefits of digital gold, investors can earn income in the form of rent from their investment in this product. Below are the details of the same and if it is a good investment opportunity for investors.
What is digital gold?
It is a tradition to buy gold on Dhanteras but one cannot ignore the drawbacks of buying physical gold. Therefore, when the option to get the benefits of buying gold without the risks involved was introduced, it was a lucrative option for investors. Under digital gold investment, investors can purchase the rupee value of the 24K purity gold. There is no minimum investment amount so the investment can be as low as Re. 1 or Rs. 100 at the convenience of the investors. This digital gold is then stored in a secure digital vault and can be liquidated at any point at the prevailing market value of gold. Investors, therefore, are free from concerns like the storage of gold, purity of gold, exchange value, liquidity, etc.
Read More: Why should you invest in Gold ETFs?
What is meant by leasing digital gold?
The various benefits of digital gold have made it a very attractive investment option for many investors. To make them more attractive to investors, SafeGold, which is one of the providers of digital gold in India, has introduced a new service called Gains where investors can earn rent on digital gold investments. This facility requires investors to lease their digital gold to small jewellers for a definite period of time and earn rent on the same at the rate of 3% to 6% per annum. The minimum digital gold that can be leased is 0.5 grams and the maximum limit for d0gtal gold that can be leased is 20 grams.
Investors can choose the jeweller themselves from the available list of MSME jewellers mentioned on the website of SafeGold. The next step is to select the tenure of the lease which can be between 30 days to 364 days at the discretion of the customer. The rate at which the jeweller will provide rent on digital gold is based on the tenure selected and the rate offered by the jeweller. The yield is calculated on daily basis and added to the digital gold account of the customer every month. It is to be noted that this yield is in the form of gold and not in any monetary terms. At the end of the lease tenure, the digital gold along with the accumulated yield earned in the form of gold will be returned to the investor.
What are the risks of leasing digital gold?
The opportunity to earn additional income on digital gold investment sounds very attractive. However, investors should be aware of the risks involved in the same before taking the leap. Some of such risks are mentioned below.
- Lack of proper regulations
The lease facility on digital gold is a new feature offered by SafeGold and therefore does not have any structured regulations imposed by SEBI or RBI to safeguard against any fraud or loss faced by customers.
- Loss of capital investment
There is always a risk that the jeweller may not return the digital gold that is leased by the customer. In such a case, as mentioned above, there may not be many remedies that would be available for customers. SafeGold assures that they have taken due measures to safeguard customer interest in the form of bank guarantees from the jewellers to the extent of 105% to 110% of the value of the leased digital gold. These bank guarantees can be raised upwards if the value of the gold increases during the tenure of the lease. However, this does not eliminate the risk of loss of capital investment.
- Liquidity issues
The digital gold is locked in for the tenure of the lease and cannot be pulled out of the same till such tenure is completed. Therefore, this erodes the benefit of investment in digital gold where investors can liquidate their holdings at any point. Jewellers can, however, cancel the lease at their discretion. Customers in such cases will be eligible to get their rent earned on the digital gold leased till the time such lease is canceled along with the original digital gold given by the customer.
- Zero guarantees from SafeGold
SafeGold explicitly mentions that they do not guarantee the safety and protection of capital and the rent earned on such gold.
- Risk of fall in gold prices
The value of digital gold is directly linked to the price of physical gold. Therefore, when the gold prices fall, digital gold prices fall too which warrants investors to liquidate their holdings. However, due to the lock-in feature for leasing digital gold, investors cannot take exit the markets to cut their losses and may have to liquidate their holdings at a lower value.
Is it a good option for investors?
The chance to earn returns on gold investment is explored under Sovereign Gold Bonds Scheme introduced by the government in 2015. However, investment in SGB required investors to furnish their actual gold which was not returned in its original form but in the form of bullion and coins.
Leasing digital gold eliminates this issue as the investment is not made in physical gold. The returns from SGBs are restricted to 2.5% for an investment tenure of 12 to 15 years. On the other hand, returns from the leasing of digital gold are in the range of 3% to 6% depending on the tenure of the lease.
Also being backed by the government, investment in SGBs, although for a longer tenure is safer and capital protection is assured. It is not the same in the case of leasing digital gold as it is a new and unregulated market. While the risks of leasing digital gold and earning rent on the same are higher, it is a good opportunity for aggressive investors with a high-risk appetite. Although it is imperative to have a full understanding of all the risks involved before opting for this facility.
Digital gold is fast being a preferred choice for purchasing gold, especially by young investors. An opportunity to earn rent on their asset adds to the attraction of investing in digital gold. SafeGold has taken due measures to ensure the safety of investors’ corpus but being new and dynamic in nature, the true verdict on the same is yet to be seen.
The rent from leasing digital gold is outside the purview of TDS but the exact tax liability on returns from leasing digital gold can be calculated after consultation with a tax expert.
There are no guarantees offered by SafeGold for the safety of the capital or relating to the returns.
No, investors cannot sell their digital gold before the completion of the lease period
The yield earned on the digital gold will be calculated on daily basis and added to the digital gold account every month.