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Investing in Paper and Electronic Gold

Investing in Paper and Electronic Gold



Indians, and especially Indian women, have a weak spot for gold. A gold ornament is treasured in Indian household as a family heirloom and passed down from one generation to another. Undoubtedly, nothing can beat the aura of physical gold and the pride that it evokes in its owner.


But when it comes to looking at gold from an investment perspective, physical gold may not offer the kind of convenience, liquidity and returns that other investment instruments may offer. To overcome the hassles of buying and selling physical gold, investors are now transacting in instruments that have gold as an underlying asset, without its disadvantages. Some of these instruments include Gold ETFs, Gold Funds, Sovereign Gold Bonds and E-Gold. Let’s briefly look at each of these:Gold ETF: Gold ETF is an exchange traded fund (ETF) that represents ownership of gold asset held on your behalf by the custodian appointed for the ETF. These ETFs are basically open-ended funds that track the price movement of gold and are listed and traded like stocks on stock exchanges on a real-time basis. Each unit of gold in the fund is equivalent to one gramme of gold. A gold ETF unit does not involve any physical delivery of gold, but it is a contract representing ownership of one gramme of gold.


Gold Fund: Gold funds are usually fund of fund schemes that invest in an underlying Gold ETF, which benchmarks their performance against the physical prices of gold. Gold funds endeavour to provide returns closely corresponding to the returns of their underlying Gold ETFs. Gold funds provide investors an opportunity to invest in gold without worrying about storing it physically, since units of Gold Funds are allotted in paper form (i.e. in the form of MF account statement).


Sovereign Gold Bond: The Government of India had launched the Sovereign Gold Bond scheme as much to rein in its fiscal deficit as to provide an alternative to purchase of physical gold to the investors. These bonds are available in denominations of 5, 10, 50 and 100 grammes, have a maximum tenure of 5 to 7 years and can be bought from banks, NBFCs, post offices and other agents. Interest @ 2.5% per annum is paid on the initial value of these gold bonds. Under the scheme, an individual investor can buy a maximum of 500 grammes in one year and the bonds can be held in paper or demat form. One can redeem the bonds before maturity by selling them on the stock exchange. E-Gold: This is a product launched by the National Spot Exchange of India (NSEL). An investor can buy gold in electronic form on NSEL’s trading platform and the gold bought will be credited to the demat account of the investor. Gold can be bought in smaller denominations of 1, 2, 3 grammes…and so on and one unit of E-Gold is equivalent to one grammes of gold. In E-Gold, one can also get physical delivery of gold at the time of settlement.