Indian marriages are unthinkable without gold jewellery. With the on-going global crisis and gold prices hitting the roof, parents are a worried lot as gold constitutes a significant proportion of expenses in Indian marriages.
This article discusses suitability of various products for the purpose of accumulating gold for marriage of your daughter. You have been buying electronic goods with easy EMIs, but now you can buy electronic gold too. This is a big boon for those parents whose daughter’s/son’s marriage is few years ahead.
So what are options available for buying gold electronically? You can choose the option depending on various factors like the time horizon over which you want to accumulate gold or how long you want to remain invested in gold. The other important factor which may impact your decision is the purpose of investing in gold.
Till some time ago there was only one way by which you could invest in gold i.e. by purchase of jewellery, gold coins or gold bars. Now with electronic medium for purchase of gold stepping in, you can choose between a slew of products — gold ETF, gold funds and e-gold. Electronic mode scores over physical mode over a longer period of time due to various factors such as purity, storage cost, risk of theft and convenience of buying in small quantities.
Investment through mutual funds
Once you have zeroed in on electronic mode of buying gold, there are two options through which you can proceed. One is through the medium of mutual funds and other is e-gold products offered by the National Spot Exchange Ltd (NSEL). Mutual funds offer two products — the gold ETFs which are traded on the stock exchanges where you can buy and sell gold with your existing stock broker and a demat account. In addition to the brokerage cost payable at the time of purchase and sell, 1% is charged by mutual fund houses for managing the scheme which effectively reduces the return on investment by approximately 1% over returns generated by the underlying gold asset. A few mutual funds have very recently launched gold fund schemes where units can be purchased from the mutual funds directly like other mutual fund schemes. These schemes will in turn invest the money collected in the gold ETF schemes of their fund houses only.
These schemes offer the convenience of investing without having a demat account and also let you invest a fixed sum of money through SIP and take the benefit of rupee cost averaging. However, like in case of gold ETF, here also the annual fund management expenses may be around 1.50% which will effectively reduce your returns by around 1.50% as compared to returns given by the underlying asset i.e. gold.
In addition, you cannot convert your gold holding directly into gold by tendering the same to concerned mutual funds unless your holding is equivalent to 1000 gram units. Moreover, since you cannot convert the units into gold, you have to invariably sell these units and pay capital gains tax and purchase gold only equivalent to the money left after providing for capital gains tax.
Investment through e-gold
This is the recent fad under the electronic mode of investment in gold. In case you want to accumulate gold in small quantity over a period of time, e-gold makes better sense. Firstly, the e-gold units purchased by you through the NSEL are fully backed by the equal quantity of gold unlike in case of gold ETFs where the investment in gold may not necessarily be the exact equivalent to the number of units issued by the mutual fund. This is due to the annual cost incurred for managing the funds and other factors like maintenance of cash balances by the mutual funds.
Since NSEL does not charge any fund management charges on an annual basis, the cost which you incur are basically the brokerage cost paid at the time of purchase of e-gold units and annual charges for the demat account which are anyway payable in case you invest in gold ETF also. Since you plan to accumulate sufficient quantity of gold in small quantity over a long period of time, the cumulative impact of saving on account of around 1% or 1.50 % over the long period gets translated into huge saving, thus ensures returns on this investments equivalent to the returns provided by the underlying assets (gold), since each unit is exactly backed by one gram of gold in the vault of the NSEL. This is because NSEL presently does not recover any charges towards storage costs of gold.
Though there are some charges for conversion of electronic gold into physical form and making charges for taking physical delivery of gold, this will not be significant as you will be taking the delivery in larger denomination and the request for such conversion will be one time only at the time of marriage of your daughter.
Another benefit here is that you save on account of capital gains which you can ensure if you decide to take physical delivery of gold from the NSEL against your holding of e-gold units. Let us understand this. Once you have taken possession of the gold from the NSEL it does not amount to any transfer attracting capital gains liability under the provisions of Income Tax Act. The same gold can be used for the purpose of making jewellery to be gifted to your daughter. What you have to do is to obtain an invoice for labour charges in respect of the jewellery made with the gold obtained from NSEL.
Since gift between close relatives is fully exempt without any limits, you can gift the jewellery to your daughter without having any income tax implications in respect of capital gains. I hope that now you know that e-gold provides you an opportunity to accumulate gold over the periods co-terminating at the time of marriage of your daughter/son with cost advantages attached to it.
The writer is CFO, ApnaPaisa.com,
a price comparison engine for loans,
insurance and investments. He can be reached at firstname.lastname@example.org