Gold ETFs vs Physical gold: Which one is better?

Indians are now investing in more evolved forms of gold such as gold ETFs. Gold ETFs may be a better option than physical gold. Here’s why

Gold ETFs vs Physical gold: Which one is better?

Indians love gold. Our love affair with the yellow metal goes back as far as history has been written and we still are the largest retail consumers of gold, second only to China.

Gold acts as a store of wealth and savings and has traditional and religious significance. At the same time, there is no other asset that matches the universal acceptance of gold has anywhere in the world. It works as a great hedge against inflation and as a currency in times of sovereign risk.

While we are no strangers to the sheen of gold, Indians have not been as forthcoming in adopting technology that makes owning gold a lot easier, safer and cost-effective. Here are some new age gold investment schemes that make it a lot more convenient and pocket-friendly to own the precious metal.

Related: Factors that affect gold prices in India

Gold ETFs

Exchange Traded Funds or ETFs are gold investment plans that allow investors to purchase/ sell and make arbitrage gains on gold through an electronic medium. Gold ETFs have been in India since 2007 and are highly regulated instruments traded on the NSE and BSE.

How to buy gold through an ETF?

Gold ETFs can be purchased through various open-ended mutual fund schemes which passively invest in bullion, mining or ancillary businesses that are directly involved in producing gold. These ETFs are held in your demat or investment account like any other mutual fund.

Investing in gold schemes through an ETF has many advantages from a pure investment perspective and here are some reasons why it may be a better option than holding on to physical gold:

  • Investment unit: Gold through ETFs is purchased in units, where each unit is equivalent to one gram. This makes purchasing gold extremely efficient and budget-friendly. It is easier to make small purchases or accumulate gold through SIP for a gold savings scheme.

The standard denomination for purchasing physical gold is usually 10 grams, also colloquially known as a ‘tola’. Smaller denominations through physical outlets may be possible but depend on the retailer you are purchasing from.

Related: 5 Mistakes to avoid while applying for a gold loan

  • Pricing: Pricing on a gold investment scheme like an ETF is completely transparent and uniform in accordance with the London Bullion Market Association (LBMA), which is the global authority on precious metals.

Pricing of physical gold, however, is not uniform and will vary from one seller to the other based on their own cost of holding, adding administrative cost and mark-ups.

  • Purity: Purity is a major concern when purchasing gold from a jeweller. Unless the gold is accredited by an authority or has a Hallmark authentication, usually selling physical gold will have some discrepancy in purity.

In a gold ETF, every unit you purchase is guaranteed with a 99.5% purity which is the standard for the highest level of purity. The value of the gold you hold is based on this purity.

  • Charges: Purchases through a gold ETF invites a brokerage of 0.5% on lesser for every trade and a management fee/expense ratio of about 1% every year for managing the portfolio. This is negligible compared to 8% - 30% making charges that one would have to pay to jewellers and banks even if the unit is purchased in the form of coins or bars.

Related: ETFs: 6 Reasons they make an excellent instrument for investors 

  • Liquidity and Returns: Buying and selling gold through ETF is very easy and swift. Making arbitrage trading a possibility. On both buy and sell trades, a brokerage is the only charge that traders would incur.

Physical gold, on the other hand, attracts the same ‘making charges’ even on a sale eating heavily into the gains (if any) of the seller. Additionally, physical gold can be only sold to retail jewellers or pawn stores even if it has been brought through a bank.

  • Holding costs: Electronic gold is held in the demat account and incurs no other cost than annual demat charges that you would be common for all equity and mutual fund holdings. At the same time, the digital format eliminates any risk of loss or theft.

Physical gold, on the other hand, has to be stowed safely. There is risk involved when holding on to tangible gold. This is the reason why many people keep their gold in safety deposit lockers which incur a hefty annual fee.

Related: Buying gold? 5 things to check before you buy 

Conclusion

A gold investment plan through an ETF is significantly convenient, cheaper and safer as an investment tool. Investors looking to add gold to their portfolio should definitely consider ETFs over physical gold for the host of advantages they provide. Alternatively, if you have physical gold that needs to be kept safe, you could opt for a gold monetisation scheme offered by the Central Government that will pay you a small interest on holing on to your asset.

Are you a smart shopper when it comes to buying gold? Take this quiz to find out!




Related Article