The returns risk of unregulated digital gold: You lose 6% the moment you buy it, explains Zerodha’s Nithin Kamath

Zerodha founder and CEO Nithin Kamath has expressed support for market regulator Securities and Exchange Board of India (Sebi)’s warning last week on digital gold. Calling it a timely reminder from the securities watchdog, Kamath explained how investors face losses the moment they decide to buy it.Kamath said digital gold is an inefficient way to invest in the precious metal as buyers lose about 6% upfront – 3% in VAT and another 2-3% due to price differences – before taking into account the additional regulatory risks.

“Digital gold is not regulated. A timely reminder from SEBI. Most people don’t realize that no one regulates digital gold, and if something were to happen to the platforms or companies that sell it, there’s not much you can do,” he said in a tweet on Wednesday.”It’s also a sub-par way to get exposure to gold. You pay 3% GST at the time you buy it. Then there are spreads of another 2-3%, which means that once you buy digital gold, you’re already down about 6%, and that’s before you even consider the regulatory risk,” Kamath further said.

Since the government has stopped issuing sovereign gold bonds (SGB), he recommends investing in gold ETFs, calling it the safest way to gain exposure to gold.

“With Sovereign Gold Bonds (SGBs) retired, gold ETFs remain one of the safest and easiest ways to gain exposure to gold. We wrote about this on @zerodhamarkets,” said the founder and CEO.

On Saturday, Sebi warned investors against digital or online platforms offering gold products as these pose significant risks to investors and may expose them to counterparty or operational risks.

“It has come to Sebi’s attention that some digital/online platforms are offering investors to invest in ‘digital gold/e-gold products’. Digital gold is being marketed as an alternative to investments in physical gold. In this context, it is informed that such digital gold products are different from Sebi regulated gold products as they are neither registered as securities nor regulated as commodity derivatives. They operate completely outside the ambit of Sebi,” the regulator said in a press release.

Read more: Sebi warns investors against unregulated platforms offering digital gold products

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