NSE kicks off trading in Electronic Gold Receipts: Is it a better way to invest than gold ETFs and physical metal?

Investing in gold just received a digital makeover, with the launch of the Electronic Gold Receipts (EGR) segment by the National Stock Exchange (NSE) effective Monday, 18 May. The exchange said that the launch follows a comprehensive mock trading exercise conducted on Saturday, 16 May, which received an overwhelming response from market participants.

NSE had earlier this month announced the launch of EGRs that offer a transparent and digitised way of trading gold.

What are EGRs?

Trading EGRs is akin to trading a digital version of gold, which is backed by the physical gold deposited with a Sebi-accredited vault manager. These are dematerialised securities and are tradable on the exchange like a stock, thus seamlessly integrating gold into the formal financial system.

Since each of the EGRs is backed by physical gold, the investors, at their discretion, can surrender the EGRs and take physical delivery of the corresponding quantity and quality of gold.

NSE on 4 May said EGRs are expected to bridge the age-old gap between physical gold and the financial markets by offering a regulated, secure, and technologically advanced platform for trading in the precious commodity.

According to the latest release, vaulting and collection centres are currently operational at Ahmedabad and Mumbai, with four additional centres at Delhi, Kolkata, Chennai and Bangalore being activated, effective today. The exchange plans a phased expansion of up to 120 centres across the country in due course of time.

What are the benefits and drawbacks of EGRs?

The advantage is clear: EGRs are held in demat, backed by physical gold in regulated vaults, traded on exchange, and can be converted into physical gold through the prescribed process. That addresses three old problems in physical gold: purity, storage and opaque resale pricing, said Harshal Dasani, Business Head at INVasset PMS.

However, the drawback is that the product is still in its price-discovery phase. "Liquidity, bid-ask spreads and broker-level access will decide whether EGRs become mainstream or remain a niche alternative," he said, adding that physical conversion also carries costs, including withdrawal, delivery and tax-related charges.

Is it a better option than physical gold and ETFs?

As EGRs eliminate the concerns around physical gold, with the option of taking delivery, this can gradually bring more standardisation and transparency to India’s fragmented bullion market, said Sunil Katke, Head of Commodities Retail Business, Kotak Securities.

However, for those who want jewellery or emotional possession, EGRs cannot replace physical gold.

When compared with ETFs, the main advantage that EGRs offer is direct beneficial ownership of gold with the option of physical delivery.

However, ETFs currently enjoy better liquidity, investor participation and operational simplicity, highlighted Katke. "So, for retail investors, they may still remain the preferred financial product in the near term. However, EGRs could become attractive for investors who want exchange-traded gold with the backing of physical metal," he added.

Meanwhile, Dasani also believes that for retail investors, EGRs are viable, but best suited for those who understand exchange trading, spreads, demat costs and the redemption mechanism. As for pure portfolio allocation to gold, ETFs remain the cleaner route today, according to him.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.