What is E-Gold?

The newest option for investment in gold is E-Gold. It has made financial asset of an otherwise unproductive physical asset. Gold as an investment cannot be overlooked for successfully meeting long term goals. It is one of the assets that are capable for overtaking inflation and a balanced portfolio should include gold in the appropriate quantity.

E-Gold is similar to shares that are bought and sold on the stock exchange. It was introduced by National Spot Exchange Ltd (NSEL) in March 2010. The concept is simple (but we're not saying the execution is!) You can buy units of gold whenever you wish from the exchange and hold it in demat form. When you want to, you can sell it for rupees or gold.

Getting started

Every unit of E-Gold is backed by 1gram of physical gold. To trade on NSEL you need to have a trading account and a demat account (different from the ones for equities) with a DP linked to NSEL. On NSEL they are called by different names- client account and beneficiary account respectively. Once you are ready with these you can look up the price and buy as many units you wish. Trade is settled on the third day and you get a demat certificate indicating the number of units you hold.

Dematerialized gold can be purchased in units of1 gram of gold. The DP charges an annual maintenance fee of around Rs 350 and transaction fee for every transaction, much like it happens on equity stock exchanges. E-Gold can be traded on NSEL from Monday to Friday from 10 am to 11.30 pm.

Taxation of E-Gold

E-Gold is treated like physical gold for tax purposes. Short term capital gains tax at the marginal rate is applicable. If selling after three years, long term capital gains tax of 20% with indexation is charged. E-Gold also attracts wealth tax. This is one area where gold ETFs score better as an investment option. However gold should always be viewed as a long term investment option.

Redeeming E-Gold

If you decide to, you can convert E-Gold units into physical gold through rematerialization. Delivery is currently made at 13 cities in India viz Mumbai, Ahmedabad, Delhi, Kolkata, Chennai, Hyderabad, Jaipur, Bangalore, Kochi, Indore, Kanpur, Ludhiana and Patna. A conversion fee is charged which depends on the amount of gold converted and units can be exchanged for coins or bars. Other charges involved are VAT and octroi, if applicable, so only economical units should be rematerialized.

E-Gold v/s other gold investments

E-Gold scores above other ways of investing in gold on several counts:

  1. Since trading is done on a pan-India exchange prices are same throughout the country. Unlike the case of gold coins, bars and jewelry there is transparency in price quotes.
  2. No storage costs involved since units are held in demat form. Annual storage cost, depending on the bank or institution, ranges between Rs. 500 and Rs. 15,000.
  3. Purity of gold is assured. NSEL keeps gold bars and coins of 995 purity.
  4. No recurring charges are involved. Gold mutual funds and gold ETFs charge expense ratio. High expense ratio can eat into the final returns, especially over a long period due to the effect of compounding.
  5. Units as small as 1 gm can be redeemed for physical gold. This is one reason why small investors should choose e-gold over ETFs since you need to accumulate a minimum of 1 kg to redeem units in gold.

Conclusion

E-Gold as an investment vehicle is yet to catch up with investors. Since commodity exchanges are less regulated than stock exchanges (which are regulated by SEBI) they may be more risky. Liquidity for e-gold is increasing phenomenally, in fact the trading volume for e-gold is larger than for gold ETFs. When the market for it is sufficiently large E-Gold could become the first choice of investors for gold investment. Till then you can use the safe and convenient ETF or mutual fund route of virtual gold!


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