Dhanteras is considered an auspicious occasion to buy precious items, like gold and silver, in India. The event falls on the 13th day of the month of Kartik in the Hindu calendar. While the tradition of buying physical gold continues, many households these days also buy digital gold.
So, if you are thinking of buying gold online, you could buy it in five simple ways: Sovereign Gold Bonds (SGB), E-Gold, non-demat digital gold, gold exchange-traded funds, and gold funds.
Sovereign Gold Bonds (SGBs)
SGBs are central government-backed gold bonds which are denominated in grams of gold, and also bear an interest of 2.5 per cent per annum on the issue price. They are issued for a fixed term of eight years with an option to redeem them from the fifth year onwards at the RBI buyback window.
Things to Know About SGBs
- Cost of Carrying And Storage: There is no storage or carrying cost for SGBs.
- Income: SGBs give out an interest of 2.5 per cent per annum at the present moment payable semi-annually.
- Conversion: At no point of time can SGBs be converted into physical gold.
- Fungibility: SGBs are fixed term long tenure bonds. They can be pledged for taking gold loans and if required can also be sold either on stock exchanges or in the RBI buyback window from the 5th year onwards.
- Taxation: There is no capital gains taxation on SGBs getting sold in the RBI buyback windows, but if sold on stock exchanges capital gains taxation will apply. The interest is also taxable for all.
E-Gold By NSE Spot Exchange (Demat Gold)
E-Gold or popularly known as demat gold is an initiative of the National Stock Exchange (NSE) spot exchange (NSEL). There are other metal e-versions too which were launched by NSEL like Silver, Zinc, Lead, others.
“NSEL has launched e-Gold, e-Silver, e-Copper, e-Zinc, e-Lead, e-Nickel and e-Platinum. Systemic investments in e-series products promote savings in a secured way offering ease of transaction and flexibility of trade timings,” NSEL said in a frequently asked question document.
Things to Know About E-Gold
Cost of Carrying And Storage: There are neither any storage cost nor a carrying cost for E-Golds.
- Income: E-Golds do not give out any interest like SGBs, but the value of it is derived from the prevailing price of Gold, since 1 unit of E-Gold equals 1 gram Gold of 995 purity.
- Conversion: E-Gold units can be converted into physical gold bar/coin by surrendering it at specified designated centres with which NSEL has made arrangements. There is a conversion charge depending upon the quantity of gold.
- Fungibility: E-Gold units are freely tradable on NSE, but no intraday trading is allowed and only delivery trades are possible. The settlement time is T+2, meaning if you buy a E-gold unit on Monday, then by Wednesday evening it will be there in your demat, you can sell it from Thursday morning onwards.
- Taxation: E-Gold units attract the same capital gains taxation laws as per any other stock exchange tradable product like stocks, ETFs, others.
Non-Demat Digital Gold
Gaurav Mathur, MD & Founder, SafeGold, a digital gold company, said that most digital gold products have a life capped at 10-12 years. At the end of this period, a customer has to either sell their gold or take delivery.
You can buy digital gold through various FinTech apps like Google Pay, Phone Pe, MobiKwik, and others.
Things to Know About Non-Demat Digital Gold
- Cost of Carrying And Storage: At the time of first buy-in of digital gold, a small fee is charged to the buy price and then for up to 5 years no carrying or storage cost is charged. However after 5 years a storage cost is charged depending upon the platform of choice.
- Income: There is no interest paid for digital gold, however one can sell it 24*7 live and instantly the money will be paid to their bank account.
- Conversion: Digital gold can be converted into physical gold and can also be exchanged for physical jewellery through participating jewellery stores.
- Fungibility: Digital gold can be gifted to one’s friends and family and sold instantly without any liquidity issues.
- Taxation: Capital gains taxation laws will apply at the time of sale of digital gold. Mathur however pointed out that “at the time of delivery/ conversion of digital gold into physical gold no capital gains taxation laws will be applicable.”
Suman Bannerjee, CIO, Hedonova, an US based alternative investment firm, said, gold ETFs hold actual physical gold as their portfolio assets. They can only invest in gold and gold related investments which have gold as its underlying asset as specified.
AMCs managing the ETF appoint custodians to handle this physical gold import process. These custodians then appoint a gold vaulting company to store these golds in secure vaults and then a delivery receipt is issued against the stored gold.
“A delivery receipt is essentially a paper saying that an X amount of gold of Y purity is stored in a specified vault and its delivery is guaranteed,” added Banerjee.
"Gold ETFs is one of the ways to invest in gold through dematerialised or paper form. It’s an alternative to buying physical gold. The fund will procure physical gold and must follow the London Bullion Market Association (LBMA) guidelines as per prescribed SEBI guidelines. The custodian will be taking delivery on behalf of the AMC needs to ensure the weight, purity, and the source of gold as specified under the LBMA guidelines," said Abhishek Dev, CEO,Epsilon Money Mart, a Mumbai based financial services company.
Things to Know About Gold ETFs
- Cost of Carrying And Storage: Expense ratio is charged on the ETF and fund because of various expenses like custodian charges, insurance, others.
- Income: There is no interest to be paid in gold ETFs and funds and the value of it is determined by the value of its invested gold.
- Conversion: Gold ETFs can be converted into physical gold, but the process entails a high investment worthy and payment of GST too. One requires a big investment in Gold ETFs to be able to demand physical gold conversion against it.
- Fungibility: Gold ETFs are highly liquid and can be sold on stock exchanges, similarly gold funds can be easily redeemed through the AMC website or other mutual fund apps.
- Taxation: Short term or long term capital gains taxation depending upon the period of holding such gold ETFs applies here.
Gold Mutual Funds
A gold mutual fund is a fund which may buy gold ETFs, gold mining company shares, equity shares of gold and related companies. It is like an ecosystem of gold investments. For example- DSP world gold fund, Nippon Gold BeES, others. Same features as etf. Both demat /non demat, entire gold ecosystem.
Rajesh Bansal, MD and CEO, Midas Finserve, a Delhi based wealth management company, said that gold mutual funds invest in gold ETFs and other instruments which have gold as their underlying or related to gold while gold ETFs invest in 99.5 per cent purity physical gold. "One doesn’t need a demat account to invest in gold mutual funds but a demat account is mandatorily needed for gold ETFs," Bansal further added.
Which Type of Gold Should You Prefer?
Piyush Nagda, director, private wealth and product strategy, Monarch Networth Capital limited, said, “On liquidity front Gold ETFs are more liquid compared to Sovereign Gold Bonds (SGB) on stock exchanges due to there being market makers for ETFs”
So if you need a highly liquid non-interest bearing pure Gold product for long term investment purposes then gold ETFs and funds are suitable.
Nagda says that he prefers SGBs because they give interest and are also tax free when sold at maturity or at the buyback window.
So if you need an interest bearing and tax free long term gold investment product, SGBs are a good option. However unlike Gold ETF, SGBs cannot be readily exited without taking a loss since on secondary markets SGBs are traded at a lower price.
Digital gold are short term non-interest bearing gold investment instruments, since after 5 years they start charging expenses for carrying and storing.