Round up Investing is a new and upcoming way of investing, made for those who find it difficult to develop the habit (or discipline) of investing.
The provider (typically an app) tracks your expenditure via UPI or cards (through messages). For each spend that you make, the app rounds the amount up to the nearest 5 or 10 (depending on your preference). The rounded up amount is then invested automatically.
Effectively, the user doesn’t have to take any effort to develop the habit of investing. Example? If you are a connoisseur of making Rs. 18 payments (if you know, you know), this option could prove to be beneficial in the long run as the balance amount that would usually go towards a Happy Dent will now go towards making you more money!
It is a long-term, effortless process of saving up. One such platform that is taking India by storm is the Jar App, with it’s round up process that invests into Digital Gold!
How Does That Work?
Digital Gold is a fairly new concept in India as most people are fond of holding the yellow metal in the palm of their hands, or in extreme cases, make gold shirts and wear them. Innovation has allowed us to invest in gold online, but it’s presence is tangible as well.
When you invest in digital gold (for as low as Re. 1), there is a locker with the equivalent amount of physical, 24K, 99.5% purity gold being stored! You can redeem this any time, and the money gets deposited in your bank account - so it’s pretty liquid that way.
Here are some benefits to this:
The minimum amount is super low
Liquid asset that can be sold and bought easily
Gold is considered to be a safe bet, especially during financial downturns
It's Not All Roses
There are two major problems with auto-investing in Digital Gold
Investing in Digital Gold can take up to 7% from your pocket - just in costs. Now why would you opt for this if you can just invest in other gold options (like Sovereign Gold Bonds), or any other investment options like mutual funds (which charge a management fee of ~2%)?
Why is this so expensive?
There are several companies that facilitate this ecosystem (buying physical gold, storage, transportation, platform to invest, etc.). These companies include Augmont, MMTC-PAMP and SafeGold. Since they’re doing a lot of the heavy-lifting, they charge transaction fees to cover costs (and of course make some money on the business). On buying + selling, transaction fees can sum up to 4%.
There is a 3% GST on Digital Gold. So that’s an additional charge compared to when you buy Gold ETFs, Gold Mutual Funds or Sovereign Gold Bonds.
2. Lack of diversification
By opting for this option alone, you will achieve the objective of investing, that too in a disciplined manner; however, without any diversification. Yes, gold is considered safe and all that; but in no way would we be pro for investing in just one asset class.
Should I Switch Completely?
Jar has piggybacked on our obsession of buying gold as Indians. Capitalising on the concept of incrementally investing in gold seems like a sweet deal, especially if it’s being done on autopilot.
We all know the deal with mutual funds, and the Systematic Investment Plan (SIP) structure. You can choose to set an amount aside on a timely basis, depending on your capacity and financial goal, and invest it into a fund.
How do the two compare?
Mutual Fund SIPs
Auto-investing in Digital Gold
Can be higher because of diversification
Returns for gold alone can be lower than equities, or even a optimally diversified portfolio
Can be lower in an optimally diversified portfolio
Can be higher because of the lack of diversification
Can cost 2.5% of the invested value
Can cost as much as 7% of the invested value
Can be as low as Rs. 100 per month
Can be Re. 1
Auto-debit every month
Auto-debit on every spend
Mutual Fund SIPs would definitely win the race as they offer
More diversification options
A more balanced portfolio
Potential for higher returns at a lower risk
And most importantly, not at a cost of 7% of the invested value
Digital Gold through an app like Jar is a clear AVOIDABLE as far as our view is concerned. If one has to invest small amounts, they can do that through mutual funds. If one lacks discipline, that too can be worked upon through mutual fund SIPs. So why end up paying a 7% fee?
The benefits just don't stack up against the cost to be paid for it. If one had to take exposure to Gold however, there are better options like Gold ETFs and Sovereign Gold Bonds.