Accumulate gold for your daughters' marriage in small quantity

Graduate from electronic goods to electronic gold!

Indian marriages are unthinkable without gold jewellery. Almost  all  parents gift   gold jewellery to their daughters at the time of their marriage and welcome their daughters-in-law with gold jewellery. With on-going global crisis and gold prices hitting the roof,  parents are a worried lot as gold constitutes a significant proportion of expense in daughter’s marriage  of any Indian. 

In this article I will discuss about suitability of various products for the purpose of accumulating gold  for marriage of your daughter. Till now you have been buying electronic goods with easy EMIs, now you can buy electronic gold too. This is a big boon for those parents whose daughter’s/ son’s marriage is few years ahead. 

So what are options available for buying gold electronically?  You can choose the option depending on the  various factors like the time horizon over which you want to accumulate gold or how long you want to remain invested in gold. The other important factor which may impact your decision is the purpose  of investing in gold.

Till some time ago there was only one way by which you could invest in gold i.e. by purchase of jewellery, gold coins or gold bars. Now with electronic medium for purchase of gold stepping in, you can choose between  these products -  Gold ETF,  Gold Funds and E Gold. Electronic mode scores over physical mode for accumulating gold over a longer period of time attributing to various reasons like purity, storage cost,  risk of theft and convenience of buying in small quantity which are taken care of by gold electronically purchased

Investment through Mutual Funds

Once you have zeroed on electronic mode of buying gold for the purpose of accumulating it for the marriage of your daughter, there are two options through which you can proceed. One is through the medium of Mutual Funds and other is E-gold product offered by National Spot Exchange. The Mutual funds offer two products -  the gold ETF which are traded on the Stock exchanges where you can buy and sell gold with your existing stock broker and  a demat account. In addition to the brokerage cost payable at the time of purchase and sell, 1% is  charged by the mutual fund houses for managing the scheme which effectively reduces the return on investment by approx. 1% over returns generated by the underlying asset Gold. A few mutual funds have very recently launched gold fund schemes where  units  can be purchased from the mutual funds directly like other mutual fund schemes. These schemes will in turn invest the money collected in the gold ETF schemes of their fund houses only. Though these offer the convenience of investing without having a demat account and also let you invest a fixed sum of money through SIP and take the benefit of rupee cost averaging. However like in case of gold ETF, here also the annual fund management expenses may be around 1.50% which will effectively reduce your returns by around 1.50% as compared to returns given by the underlying asset i.e. Gold.

In addition, you cannot convert your gold holding directly into gold by tendering the same to concerned Mutual Funds  unless your holding is equivalent to 1000 grams of units. Moreover since you cannot convert the units into gold, you have to invariably sell these units and pay capital gains tax and purchase gold only equivalent to the money left after providing for capital gains tax.

 

Investment through E-gold

This is the recent fad under the electronic Gold mode of investment in gold. In case you want to accumulate gold in small quantity over the long period then E Gold makes better sense. Firstly, the E gold units purchased by you through National Spot Exchange Limited are fully backed by the equal quantity of Gold unlike in case of gold ETF where the investment in gold may not necessarily be exact equivalent to the number of units issued by the mutual fund. This is due to  annual cost incurred for managing the funds and other factors like maintenance of cash balances by the mutual funds.

Since NSEL does not charge anything akin to the fund management charges on yearly basis, the cost which you incur are basically the brokerage cost paid at the time of purchase of E- gold units and then annual charges for  the demat account which are anyway payable in case you invest in gold ETF also. Since you plan to accumulate sufficient quantity of gold in small quantity over a long period of time, the cumulative impact of saving on account of around 1% or 1.50 % over the long period gets translated into huge saving,  thus ensures returns on this investments equivalent to the returns provided  by the underlying assets i.e.  Gold since each units is exactly backed by one gram of gold in the vault  of the NSEL. This is due to the reason that  NSEL presently does not recover any charges towards storage costs of the gold being incurred by them for safe keeping of the same with safe deposit vaults.

Though there are some charges per request for conversion of electronic gold into physical  and making charges for taking physical delivery of gold, this will not be significant as you will be taking the delivery in larger denomination and the request for such conversion will be one time only at the time of marriage of your daughter.

One more benefit here is that you save on account of capital gains which you can ensure if you decide to take physical delivery of gold from the NSEL against your holding of E Gold units. Let us understand this. Once you have taken possession of the gold from the NSEL it does not amount to any transfer attracting any capital gains liability under the provisions of Income Tax Act. The same gold can be used for the purpose of making jewelry to be gifted to your daughter. What you have to do is to obtain an invoice for labour charges in respect of jewelry made with the gold obtained from NSEL.

Since gift between close relatives is fully exempt without any limits, you can gift the jewelry to your daughter without having any income tax implications in respect of capital gains

I hope that now you know that E gold provides you an opportunity to accumulate gold over the periods co terminating at the time of marriage of your daughter./son with cost advantages attached with it.