Investing in Gold has always been a popular choice for Indians. It’s considered a safe haven, a hedge against inflation, and a solid way to diversify your investment portfolio.
However, not all gold investment schemes are created equal. One such scheme that has recently caught my attention was Gullak’s Gold+.
In this blog, we will explore what Gullak is, why there are better options than Digital Gold for you, and why you should refrain from investing in the Gold Leasing schemes.
Estimated read time: 5 minutes and 21 seconds
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Buckle up. Here we go!
What is Gullak?
Gullak is a fintech company that offers various financial services and products aimed at making saving and investing in Gold easier for individuals.
One of their key products is Digital Gold, allowing users to buy, sell, and accumulate gold in digital form. The convenience and simplicity of investing in gold through an app have made Gullak a popular choice among tech-savvy investors. Gullak boasts of having a user base of over 9 lakhs.
However, as with any investment, it’s essential to understand the risks and returns involved.
Why You Should Be Cautious About Investing in Digital Gold?
Digital Gold offers a way to invest in gold without the hassles of storage and security. You can buy gold online, and it is stored in secure vaults by the service provider. While this sounds convenient, there are several reasons why Digital Gold might not be the best investment choice:
- No Regulatory Framework: Unlike gold investments such as Gold ETFs and Sovereign Gold Bonds (SGBs), Digital Gold does not fall under the purview of any regulatory authority like SEBI or RBI. This lack of regulation can pose significant risks regarding the safety and security of your investment.
- High Costs: Digital Gold investments often come with hidden costs. These can include GST, buy/sell spread, storage fees, making and delivery charges, and a premium over the actual market price of gold. Over time, these costs can eat into your returns.
- Liquidity Issues: While selling digital gold is relatively easy, the price you get might not always be favourable. There are discrepancies between the buying and selling prices, leading to potential losses.
- Tax Implications: Gains from digital gold are treated as short-term or long-term capital gains, depending on the holding period. This can result in a higher tax burden compared to other forms of gold investment like SGBs, which offer tax-free capital gains if held till maturity.
But you know what?
In many cases, Digital Gold is better than Physical Gold. Read here, if you want to know why.
What is Gullak’s Gold+ Scheme?
Gullak’s Gold+ scheme is marketed as a way to earn additional returns on your digital gold investment. The scheme works on a concept called gold leasing. Here’s how it’s supposed to work:
- Gold Leasing: When you invest in the Gold+ scheme, through Augmont, Gullak leases your gold to jewellers. In return, you earn a fixed digital gold, typically around 5% per annum, in addition to any appreciation in the value of gold.
- Additional Returns: The 5% return is touted as an extra earning over the usual price appreciation of gold. This makes the scheme look attractive, especially when SGB provides only 2.5% interest p.a.
While the promise of additional returns sounds good, the scheme comes with its own set of risks.
The safety of your investment depends on the financial health and integrity of the lessees (jewellers and businesses) to whom the gold is leased. Any default by these parties could lead to significant losses. Also, this investment is unregulated.
Our Concern With the Gold Leasing Scheme of Gullak
On a standalone basis, Gullak’s gold leasing scheme appears attractive. However, our concerns arose when Gullak made misleading claims about the performance of their Gold+ scheme compared to Sovereign Gold Bonds (SGBs).
Through various ad campaigns and questionable statistics, Gullak suggests that their Gold+ scheme yields better returns than SGBs while hiding significant hidden costs associated with digital gold.
Our research also revealed that SafeGold offers a similar service through its Gains by SafeGold scheme, which provides a 3.5% return in digital gold per annum compared to Gullak’s 5%.
And to understand why you should be cautious about Gullak’s Gold+ and SafeGold’s Gains scheme, we compared Gullak’s Gold+ with SGB.
Comparing Returns: Gullak Gold+ vs. Sovereign Gold Bond (SGB)
Here are a few key differences between SGB and Gullak Gold+ that you need to understand before we get to the numbers:
Sovereign Gold Bonds (SGBs)
- Regulated by RBI: SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India, making them a very safe investment.
- Fixed Interest Rate: SGBs offer a fixed interest rate of 2.5% per annum, payable semi-annually.
- Tax Benefits: The interest earned is taxable, but the capital gains are tax-free if the bonds are held till maturity (8 years).
- Liquidity: SGBs can be traded on stock exchanges, providing decent liquidity.
Gullak’s Gold+
- Lack of Regulation: The scheme is not regulated by any central authority, increasing the risk factor.
- Higher Promised Returns: The scheme promises an additional return of 5% per annum in terms of digital gold.
- Higher Risk: The scheme involves lending your gold to third parties, exposing you to credit risk. Though they provide bank guarantees, it is not regulated so investors don’t have much legal recourse.
- Tax Implications: Similar to digital gold, you have to pay GST on purchase and the gains are subject to capital gains tax.
Now let’s get to the numbers.
There you go. Without adding the Gold’s market price appreciation, investing ₹1 lakh in Gullak Gold+ would leave you with ₹98,485. That’s a return of -1.52%.
And after adding the average gold market value return of 11%, you end with ₹1,09,155. That’s a return of 9.15%. While you receive around 14.2% return with SGBs.
Now, you might be wondering how digital gold leasing can generate a negative return without adding the gold’s market return.
This is because of the GST you pay on digital gold’s purchase, the premium you pay over the actual market price of gold while buying the digital gold and the lower price you receive while selling your digital gold (buy/sell spread).
Check out the detailed breakdown of our calculation in this Google sheet.
Our Assumptions
Now, after seeing the results, we know that many would say that Gullak’s or SafeGold’s gold leasing schemes will generate better returns in the long term. And ask why we didn’t calculate the returns for let’s say, 5 or 8 years.
We didn’t do that because we believe the investors of Digital Gold and SGB are different. Both investment products are marketed differently.
SGB with its lock-in period and capital gain tax benefits if held till maturity attracts long-term investors.
And digital gold with its easy-to-invest, store, no lock-in and other conveniences attract short-term investors. Or the investors who would ultimately want to convert their digital gold into physical gold ornaments.
But here’s the thing. Most digital gold investors are not aware of the delivery and making charges they have to pay to convert their digital gold to physical ornaments.
Also, we are not 100% sure about the tax complications this digital-to-physical gold conversion will cause. Like while redeeming your digital gold you have to pay capital gain tax? And then while purchasing the physical gold again you have to pay GST and making charges.
It is very tricky to add these elements into the calculation. Therefore, we chose to compare the returns in the short term.
Final Thoughts
While the idea of earning extra returns on your digital gold investment through gold leasing might seem appealing, it is crucial to understand the underlying risks and compare them with other available options.
Sovereign Gold Bonds, for instance, offer a safer and more regulated way to invest in gold, with additional benefits like tax-free capital gains and semi-annual interest payments.
Before making any investment, it’s essential to thoroughly research and understand the product, its risks, and its returns. On paper, Gullak’s Gold+ and SafeGold’s Gain scheme might promise higher returns, but the associated risks and lack of regulatory oversight make it a less attractive option compared to SGBs and other traditional gold investments.
Always prioritise safety and regulatory backing when investing your hard-earned money.
Share these insights with your buddies.
Still Curious?
If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
Mint – Don’t be carried away by ‘up to 16%’ return on gold leasing
The Economic Times – Now you can earn rent on your digital gold, but should you go for it?
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.
