Electronic gold can be exchanged for physical gold at any time after surrendering the demat certificates to a depository participant
India is the largest consumer of gold in the world. The consumption of the yellow metal by Indians accounts for nearly one-sixth of the total consumption of gold in the world. The sheen of gold has attracted the people of India from times untold.
In our country, gold is a popular investment across the social strata because of the status it provides as a safe-haven asset that gives good and sure returns when all other asset classes fail.
However, in recent times, many Indians are realising that keeping physical gold in bank lockers is not the ideal way to invest in the yellow metal. People in the country are seeking better alternatives to invest in gold. Here are the most common ways of investing in gold electronically.
Sovereign gold bonds: Sovereign gold bonds were introduced by the Government of India to discourage the demand for physical gold and encourage Indians to own paper gold that would benefit the fiscal deficit of the country. The biggest advantage of investing in sovereign gold bonds against any other form of gold investment is the fact that bondholders receive an interest coupon of 2.5% per annum. Sovereign gold bonds have a lock-in period of five years. At the end of lock-in period of five years, the principal received by the investors will be decided on the price of gold prevailing at that time. These bonds are listed on the stock exchanges and investors can actively trade them, in the same way as stocks. Another big benefit of sovereign gold bonds is that they are tax-free for individual investors. Gold bonds also eliminate the risk and costs of storage of physical gold.
Gold ETF: Gold exchange traded funds (ETFs) are professionally-managed funds that are traded on the stock exchanges. Buying and selling of ETF units happen just like a stock during market hours. There are several benefits of owning gold ETFs. ETFs can be traded like shares and are liquid in nature. ETF holders do not have to worry about theft or pay bank-locker charges. However, the exchange-traded funds do have an asset management fee of 1% per annum. This can be a significant drag on performance over the long term.
E-gold: If you want all the benefits of investing in gold without worrying about storage in its physical form, e-gold is just the thing for you. E-gold is gold that is held electronically in the investor’s demat account. This electronic gold can be exchanged for physical gold at any time after surrendering the demat certificates to a depository participant. E-gold facility is offered by the National Spot Exchange Limited (NSEL). E-gold has the same taxation treatment as physical gold and only qualifies for long-term capital gains if the holding period is more than three years. However, the biggest advantage of e-gold is that they can be exchanged for physical gold at any time, which is helpful during occasions such as a wedding in the family.
Gold Futures: Gold futures are another way of investing in gold. Gold futures, like other commodity futures, tracks the spot price of gold. Gold futures are actively traded on commodity exchanges. However, this product should only be used by investors who are very experienced and have a high-risk tolerance. Gold futures offer investors a high degree of leverage which can give high returns but can also magnify losses significantly.
The traditional way of physically holding gold is slowly making way for electronic investment in gold. Out of the electronic methods, sovereign gold bonds is the best as it combines low transaction costs, tax exemption and interest coupons. These reasons ensure that an investment in sovereign gold bonds would give the returns out of all the online methods of investment.
TAKING SHINE TO DIGITAL
- Electronic gold can be exchanged for physical gold at any time after surrendering the demat certificates to a depository participant.
- Gold ETFs can be traded like shares and are liquid in nature. ETF holders do not have to worry about theft or pay bank-locker charges
- Gold futures track the spot price of gold. Gold futures are actively traded on commodity exchanges.
The writer is head of research and ARQ - Angel Broking
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