E-Gold: Gold and silver are the metals that overshadow the commodity market. The National Spot Exchange initiated e-gold in India in the year 2010. E-gold provides a better solution for investors as they can now invest in gold with much fewer denominations than physical gold. This is an electronic way to buy gold. This is held electronically in the demat form and can be converted into physical gold.
Gold ETFs: Gold Exchange Traded Funds or Gold ETFs are units that represent physical gold and these might be in paper or dematerialized form. These are traded on the exchange like a single stock of a company. Investment in gold ETFs helps to keep gold as a part of the investment portfolio. Some ETFs have the option of taking physical delivery but some don’t. Those ETFs that can be sold can be sold to purchase jewelry or other forms of gold whenever needed.
Little extra returns earned over the years translate as a substantial amount in the savings. So, investors preferred ETFs over physical gold and now the contest is between gold ETFs and e-gold.
Comparing E-Gold and Gold ETFs
Returns: E-gold has given healthier returns than gold ETFs. Data shows that the returns from e-gold were 16% when compared to 11% derived from gold ETFs in the year 2012. The values returned from e-gold and gold ETFs in the year 2011 were 32 and 31 % respectively.
Gold ETFs net asset value or NAV is calculated after removing the fee of the asset management company in addition to storage and custodian charges which is decided by the fund. The cost of trading e-gold in the spot market is nominal.
As e-gold does not have recurring expenses like management fee, it decreases the cost and this translates as an increase in returns for each additional year.
Investors follow NAVs in case of gold ETFs and these vary with prices of gold but in case of e-gold, the investors track the price of gold directly.
Brokerage: Brokerage fee has to be paid for trading in gold ETFs as well as in e-gold. The charges in case of e-gold include a one-time transaction fee of 2 to 3 paisa per gram and the brokerage fee is 0.2-0.3%. In case of gold ETFs, these charges are much higher.
Taxation: In case of Gold ETFs one year is taken as an as long-term and it is three years in case of e-gold. Wealth tax has to be paid for e-gold. Gold ETFs are treated similarly to Mutual funds so there is no wealth tax.
If gold ETFs are sold within one year, the gains from this are taxed as person’s tax slab and at 20% (following indexation) if sold after a period of a year. The gains accrued from e-gold, if sold within three years attract tax as per the tax slab. It is taxed at 20 percent (following indexation) if sold after three years.
Timings of Trading: E-gold can be traded from 10 AM till 11:30 PM whereas gold ETFs are available in the market up to 3:30 PM. This facility can be availed for both e-gold and Gold ETFs from Monday to Friday.
Investment Amount: E-gold is a cheaper option. The cost of holding is Rs 0.60 per unit per month.
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Term Benefits: If a very long tenure benefit is the criterion, then e-gold is a better option whereas gold ETFs provides short-term benefit.
Rematerialization: The “rematerialization” of e-gold to gold can be done but the minimum amount of converting is fixed at 8 grams. In case of gold-ETFs, it can be converted to yellow metal only when the minimum size is 500 g to 1 Kg. It is difficult for small investors to accumulate this huge amount of gold.
Demat Account: Investment in Gold ETF can be done using the existing equity demat account whereas investing in e-gold needs a separate demat account with NESL.
Delivery Centres: The delivery centers of the National Spot Exchange are spread over fifteen cities in the country but in case of ETFs there is only one delivery center in Mumbai. E-gold can be converted to jewelry directly through few reputed jewelers who adhere to the purity and transparency criteria. The investors need to pay for the making charges.
Liquidity: All ETFs can’t be sold but e-gold investors can take delivery whenever they want to. There has been a tremendous rise in the liquidity of e-gold and the present average daily turnover value is Rs 200-250 crore. It is Rs 15 to 20 crore in case of gold ETFs. A retail investor requires liquidity as it makes buying and selling more efficient by decreasing the impact cost. The impact cost for e-gold is 10 to 15 paise only whereas it is Rs 4-5 in case of gold ETFs.
Impurity: There is no threat of impurity.
Threat: There is no threat for e-gold. A study of the pros and cons leads to the conclusion that if the tenure is more than three years then investment in e-gold is a better option than investing in Gold ETFs.