I came across a lot of questions on the message boards of Mutual Fund
sites as to which of the two options, Gold ETF or E-Gold, is a better
avenue to invest. These questions are increasingly asked as a couple of
years back when people only had the option to buy physical gold, now
there many avenues available (Refer to Different Avenues Of Investment In Gold). I did read through a couple of articles
and based on the information I could gather, here are my observations.
Why I have chosen only two avenues of Gold i.e. Gold ETF and E-Gold,
because they both offer the option to take the delivery of units in
physical form at the time of selling.
Both, Gold ETF and E-Gold are good, however you will need to consider following factors before investing in either one
To be able to invest in Gold ETF you need a demat account and a trading account with a broker or with an AMC. This involves account opening charges and maintenance charges. There is also a fund management fee also referred to as the expense ratio (usually 1%) which gets deducted from the NAV of the fund.
On the other side E-Gold, investors need to open a demat account with one of the affiliates associated with National Spot Exchange. This account is different from the one used for transacting in equities or gold ETFs. However the account opening charges are also applicable here. But here E-gold scores over Gold ETFs since the transaction cost and brokerage involved in E-gold is less than Gold ETF. The transaction cost is Rs 5 for each transaction worth Rs 1 Lakh.
In both the avenues of investment, SIP is not available. So if a person plans to invest in anyone of the avenues than the transaction cost needs to be considered. Even though SIPs are not available in Gold ETF, some AMCs do have the concept of DIYSIP (Do It Yourself SIP) wherein an investor can give standing instruction to the AMC for purchasing units / stocks at the market price on a particular day of the month, works the same as SIP, however every purchase is a fresh purchase and hence the STT (Securities Transaction Cost) and Brokerage will also need to be accounted for while going for the DIYSIP option.
Since Gold ETFs are traded on stock exchanges, they can be traded (bought and sold) only between 9:00 AM to 3:30 PM on weekdays.
However E-series products i.e. E-Gold can be traded from 10:00 AM to 11:30 PM on weekdays.
Here again E-gold scores over Gold ETFs
Gold ETFs can be converted to physical form, however till now ONLY Motilal Oswal Gold ETF offers the flexibility to convert Gold ETF units in physical form at the time of selling for as low as 10 grams. Other AMCs also offer the flexibility to convert Gold ETF in Physical form at the time of selling, however the holding unit criteria is very high. HDFC itself the criteria is 1 KG, so if you are holding less than 1000 units then you cannot convert the MF units in Physical Form.
E-gold units can be converted in physical form for as low as 8 gms as well as the multiples in which the E-gold can be converted in Physical Form at the time of delivery is very less.
Again E-Gold scores over Gold ETFs
Gold ETFs if sold within an year attract short term capital gains. If held for more than an year than the tax on the income generated from the sale of units is reduced to 10% without indexation and 20% with indexation (considered as debt funds).
However in this case E-Gold if held for less than 3 years than the income generated from the sale of E-Gold units will be clubbed in the overall income of the person and depending on which tax slab he falls in; he will be taxed accordingly. If held for more than 3 years than the income generated from the sale of E-gold units will be considered as long term capital gains and will be taxed at the rate of 20%.
However in both the cases, if the delivery is taken in physical in either Gold ETF or E-Gold than the holding will become taxable under Wealth Tax Act.
Looking at the above four points, EXCEPT for the long term capital gains tax criteria, from a long term holding perspective, E-Series can be considered as a better option than the Gold ETFs.
The taxation factor will need to be looked at once again as DTC is going to be applicable from the next fiscal year, till then Happy Investing....
Both, Gold ETF and E-Gold are good, however you will need to consider following factors before investing in either one
1. Account Opening
To be able to invest in Gold ETF you need a demat account and a trading account with a broker or with an AMC. This involves account opening charges and maintenance charges. There is also a fund management fee also referred to as the expense ratio (usually 1%) which gets deducted from the NAV of the fund.
On the other side E-Gold, investors need to open a demat account with one of the affiliates associated with National Spot Exchange. This account is different from the one used for transacting in equities or gold ETFs. However the account opening charges are also applicable here. But here E-gold scores over Gold ETFs since the transaction cost and brokerage involved in E-gold is less than Gold ETF. The transaction cost is Rs 5 for each transaction worth Rs 1 Lakh.
In both the avenues of investment, SIP is not available. So if a person plans to invest in anyone of the avenues than the transaction cost needs to be considered. Even though SIPs are not available in Gold ETF, some AMCs do have the concept of DIYSIP (Do It Yourself SIP) wherein an investor can give standing instruction to the AMC for purchasing units / stocks at the market price on a particular day of the month, works the same as SIP, however every purchase is a fresh purchase and hence the STT (Securities Transaction Cost) and Brokerage will also need to be accounted for while going for the DIYSIP option.
2. Trading Time
Since Gold ETFs are traded on stock exchanges, they can be traded (bought and sold) only between 9:00 AM to 3:30 PM on weekdays.
However E-series products i.e. E-Gold can be traded from 10:00 AM to 11:30 PM on weekdays.
Here again E-gold scores over Gold ETFs
3. Conversion to Physical Gold
Gold ETFs can be converted to physical form, however till now ONLY Motilal Oswal Gold ETF offers the flexibility to convert Gold ETF units in physical form at the time of selling for as low as 10 grams. Other AMCs also offer the flexibility to convert Gold ETF in Physical form at the time of selling, however the holding unit criteria is very high. HDFC itself the criteria is 1 KG, so if you are holding less than 1000 units then you cannot convert the MF units in Physical Form.
E-gold units can be converted in physical form for as low as 8 gms as well as the multiples in which the E-gold can be converted in Physical Form at the time of delivery is very less.
Again E-Gold scores over Gold ETFs
4. Taxation
Gold ETFs if sold within an year attract short term capital gains. If held for more than an year than the tax on the income generated from the sale of units is reduced to 10% without indexation and 20% with indexation (considered as debt funds).
However in this case E-Gold if held for less than 3 years than the income generated from the sale of E-Gold units will be clubbed in the overall income of the person and depending on which tax slab he falls in; he will be taxed accordingly. If held for more than 3 years than the income generated from the sale of E-gold units will be considered as long term capital gains and will be taxed at the rate of 20%.
However in both the cases, if the delivery is taken in physical in either Gold ETF or E-Gold than the holding will become taxable under Wealth Tax Act.
Looking at the above four points, EXCEPT for the long term capital gains tax criteria, from a long term holding perspective, E-Series can be considered as a better option than the Gold ETFs.
The taxation factor will need to be looked at once again as DTC is going to be applicable from the next fiscal year, till then Happy Investing....
