Which Form Of Electronic Gold Suits Your Needs The Best?
The pros and cons of digital gold options.
The recent introduction of electronic gold receipts by BSE Ltd. creates another avenue for investors looking to diversify their investment portfolios by adding digital gold.
The other options include gold exchange traded funds, or ETFs, and the Union Government’s sovereign gold bond.
Here’s a look at the pros and cons of each option:
Electronic Gold Receipts
EGRs, launched earlier this week, are the latest addition to the list of non-physical gold investments available in India. These are receipts that are traded on the stock exchange, which give an investor exposure to gold. The exchange holds the underlying value of the receipt in physical gold in a vault, meaning that an investor is buying gold in dematerialised form.
The BSE, previously known as the Bombay Stock Exchange, received the Securities and Exchange Board of India’s permission for starting trade of EGR on its platform.
In fact, Muhurat trading of these receipts was conducted this festive season.
Investors have the option to buy EGRs in two levels of purity—995 and 999—and in multiples of 1 gm. The exchange will also allow for delivery of physical gold in multiples of 10 gm and 100 gm.
For those with existing demat accounts, this becomes an easy way to buy and hold gold. In that sense, this is similar to the process of investing in equity shares. The volume of these receipts need to be watched in terms of how they pick up as this will determine the ease of investment.
In addition, low volumes can also mean a bigger spread leading to an impact on returns. In terms of taxation, holding these receipts for more than three years will make them long-term in nature with a tax rate of 20% with indexation.
Short-term capital gains for holding less than three years will be added to the income and taxed at the applicable slab. This taxation is similar to that of Gold ETF.
Gold Exchange-Traded Funds Or Gold Savings Fund
Gold ETF gives an exposure to gold through units which investors can buy on the stock exchange. They are, therefore, similar to EGRs as both can be bought on the stock exchanges and are backed by physical gold. The only difference is that in Gold ETF, you are buying units in a fund while in EGR you are buying gold directly. Gold savings fund also gives the same exposure as they invest in Gold ETF.
Investors, who do not have a trading and demat account, would find the gold savings fund a suitable choice as they can do a systematic investment plan or SIP in this fund.
In Gold ETF or EGR, the investor must conduct each transaction on their own. Till the time that EGRs grow in volume and data is available on prices for effective comparison, Gold ETFs remain as the top choice for investors who want financial exposure to gold.
Sovereign Gold Bonds
SGB represents one of the most convenient ways to invest in gold. The investor can buy these bonds in the quantity they want, starting from 1 gm going up to 4 kg a year.
There is a 2.5% interest paid on these bonds every year, which makes it more lucrative than other investment options in the long term.
The bonds are issued for a period of eight years with a lock-in of five years for redemption. These bonds are also traded on stock exchanges, but so far liquidity is low.
It is ideally meant for investors who have a slightly longer-term outlook on gold and remains a good choice for exposure to the precious metal due to the extra interest.
(Arnav Pandya is founder of Moneyeduschool.)