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Gold monetisation scheme: Is it time to swap gold ETFs for gold deposits?

Investors will earn an additional 1% and save on fund management charges if they convert holdings to physical gold and put it in the scheme.

, ET Bureau|
Updated: Jun 01, 2015, 09.05 AM IST
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Investors will earn an additional 1% and save on fund management charges if they convert holdings to physical gold and put it in the scheme.
Investors will earn an additional 1% and save on fund management charges if they convert holdings to physical gold and put it in the scheme.
While those who own gold jewellery may not be attracted to the gold monetisation scheme, it can be a golden opportunity for investors in gold ETFs. They can convert their holdings in gold ETFs and gold mutual funds to physical gold and deposit it in the scheme to earn additional returns. They will still hold the same amount of gold but can earn additional 1% tax-free returns on their holdings per year. "It’s a brilliant scheme for people who buy gold only as an investment," says Vinay Agrawal, CEO of Angel Broking. What’s more, they won’t have to pay the annual expenses charged by fund houses for managing their money. "When you go for gold deposits, you could effectively get 2% higher returns per annum compared to what a gold fund offers," says Tanwir Alam, Founder & CEO of Fincart.

But investors will have to cross a few hurdles to get those returns. The draft guidelines do not mention whether gold ETFs can also be submitted to banks under the scheme. This means investors will have to first sell off their paper gold and use the proceeds to buy 24-carat gold which will then be put in the scheme. Selling ETFs is easy but you have to suffer a 2-3% loss because the current market prices of gold ETFs are lower than the NAVs of these funds (see table).

Gold monetisation scheme: Is it time to swap gold ETFs for gold deposits?

You also have to add the 0.25-0.5% brokerage on the transaction. Though that is a minor issue, the bigger problem is the capital gains tax that will be payable on any gains from the gold ETF or fund. If the sale is within three years of purchase, the gains will be added to the income of the investor and taxed at normal rates. If the gold ETFs were bought over three years ago, the tax will be only 20% with indexation benefit.

The next step is to buy 24-carat bars. This is also easy but again leads to a loss. Purity of the gold is important but the banks that sell 24-carat gold charge very high mark ups of 8-20% (see table). Even if the scheme offers 2% per year, a 10% mark-up will nullify the earnings in five years.

Gold monetisation scheme: Is it time to swap gold ETFs for gold deposits?


The other option is to buy gold bars or coins from a jeweller. Most jewellers quote a flat mark-up of Rs 1,000 per 10 grams, which works out to around 3.8% of the current market price. The other option is to buy gold from the commodity exchanges, which will ensure purity but keep the mark-up charges low. The total mark up, including brokerage and delivery charges, would be around 0.5%. But the problem is that the minimum contract is for 100 grams (worth Rs 2.7 lakh) and delivery is limited to select cities in the country.

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