With Akshaya Tritiya barely a week away, jewellers and banks are offering discounts on gold jewellery and coins/bars, as buying gold on that day is considered auspicious by Indian tradition.
However, for an investor, physical gold is not the only option. In the last few years, gold exchange-traded funds (ETFs) have also done well. According to data from the National Stock Exchange, the gross traded value of gold ETFs on Akshaya Tritiya alone went up from Rs 345 crore to Rs 846 crore, witnessing a 145 per cent rise between 2010 and 2011. The number of folios also touched 400,000 in September 2011 from 140,000 in March 2010.
The trend is expected to continue this year, too, according to Jayant Manglik, president (retail distribution) at Religare Securities. There are 12 asset management companies (AMC) which offer gold ETFs.
ETFs are also cheaper. Since gold coins and bars have to be moulded to a particular size and shape, jewellers charge a making cost of seven to 21 per cent over and above the price of gold. Add to that, for storing your physical gold in lockers, depending on the institutions, the charge can be between Rs 500 and Rs 20,000. One can save on these overhead costs while investing in paper gold, as the units are electronically held.
Jaideep Bhattacharya, chief marketing officer with UTI Mutual Fund, says gold ETFs are a cheaper proposition, as there is no entry or exit load on it. But there is a brokerage. E-gold units, where one unit is equal to one gramme of gold, is bought and sold via the spot exchange just like shares, making it a very liquid option to invest in.
Whereas, while selling physical gold to your local jeweller, he will always buy it from you at a price lower than the price prevailing on that day. Also, there is no uniformity in gold prices, as it varies depending on the state that you are selling or buying it in.
On redemption of the ETF units, usually AMCs give physical delivery of gold if the quantity is around one kg. Else, you have the option of redeeming the equivalent amount in cash.
Gold used in ETFs is 99.5 per cent pure, whereas e-gold offers 99.9 per cent purity as it is sourced from authorised custodians. Always remember to buy certified gold from your jewellers, because you may not get value for it while selling the same piece in future.
You end up paying more in the form of tax when it comes to physical gold. Wealth tax would be one per cent of the gold value exceeding Rs 15 lakh. “Investing in paper gold is tax-efficient,” says Hemant Rustagi, chief executive officer, Wiseinvest. “This is because one doesn’t need to pay value-added tax or wealth tax on it, unlike in the case of physical gold. In physical gold, one gets the benefit of long-term capital gains tax after three years, whereas in gold ETFs, you get it just after a year.” You will get indexation benefits, as these are taxed like debt funds.
| ALL THAT GLITTERS | ||||
| Parameter | Fund of funds | Gold ETFs | Jeweller | Banks |
| Mode of holding | Mutual fund units | Demat | Physical (bars/coins) | Physical (bars/coins) |
| Pricing | Spot gold price | Spot gold prices | Differs | Differs |
| Purity | High | 99.50% | Can't say | High |
| Wealth tax | No | No | Yes | Yes |
| Long-term capital After 3 years gains tax | After 3 years post-1 year | Indexation benefits post-1 year | Indexation benefits | |
| Liquidity | High | High | Relatively at high cost | Low on liquidity |
If one doesn’t have a demat account, don’t worry. You can always take the fund of funds route. Through these, there are no brokerages. But there are other expenses, such as exit load and annual expenses (like debt funds).Therefore, it is a wise alternative to consider paper gold as an investment option. You do away with the unnecessary costs and risks associated with its physical form. You can go through the ETFs or fund of funds way to accumulate gold for specific purposes by using the SIP (systematic investment plan) route.
