Gold ETF vs Physical Gold

Gold ETF vs Physical Gold: Which Is Better for Indian Investors?

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Gold jewellery – beautiful, isn't it? Gold is not just lovely when you adorn it, but also when it adds value to your net worth. Investing in gold helps diversify your investment portfolio, protects your money from inflation, and can possibly generate returns over time. The question is, how should you invest in gold? Should you buy physical gold from a jeweller or by using modern tools like gold Exchange Traded Funds (ETFs)? This article will walk you through gold ETFs vs. physical gold and help you figure out which option works best for you.

What is a gold ETF and how does it work?

A gold ETF is a way to invest in gold without physically buying or storing it. It is a type of investment fund traded on the stock exchange, just like shares. Each unit of a gold ETF generally represents one gram of 99.5% pure gold and moves in line with domestic gold prices. You need a demat and trading account to invest in gold ETFs, and you can buy or sell them during market hours. The investment stays in your account until you sell it.  

How does physical gold compare as an investment?

Physical gold is the old-school, traditional way to invest in the precious metal. You can buy it from a jeweller in various forms, such as coins, bars, or jewellery like necklaces, rings, and bangles. The price is based on the per-gram value of gold on the day of purchase. However, jewellers also charge making charges, which can add to the cost and may be deducted when you sell the gold later. Most reputable jewellers provide a certificate of authenticity, which assures you of the purity of the gold.  

Liquidity, storage, and safety: Which option wins?

To settle the physical gold vs. gold ETF debate, let's look at three key factors:

  • Liquidity: Gold ETFs are generally more liquid since they can be bought and sold on the stock exchange at any time, just like shares. Physical gold can also be bought or sold whenever you want, but it may take time to find the right buyer and the right price. Jewellers may deduct making charges or even refuse to buy back jewellery if it does not meet their requirements.
  • Storage: Gold ETFs are stored in your demat account, so there is no hassle of physical storage. Physical gold, on the other hand, needs to be stored at home or in a locker at the bank. Bank lockers involve extra costs, such as annual fees or the requirement to open a fixed deposit to get a locker facility.
  • Safety: Gold ETFs are considered more secure because they are held digitally in a demat account. Physical gold is more vulnerable to theft, robbery, loss, and even natural disasters like fire or flood. If you own physical gold, you are responsible for keeping it safe, which may mean added expenses or effort.

Cost and taxation: ETF vs physical gold

Let's understand the cost and taxation involved in investing in both formats:

  • Cost: Gold ETFs usually involve lower costs. There may be transaction charges and demat account maintenance fees, but these are typically minimal, although the fund houses change an expense ratio within the prescribed limit of SEBI. Physical gold, however, can come with additional expenses such as making charges, especially for jewellery. It can also involve storage costs and the risk of getting a lower resale value because jewellers may deduct making charges or pay less than the market rate.
  • Taxation: The tax treatment for gold ETF returns and physical gold is largely the same. If you hold them for 24 months or more, the gains are considered Long-Term Capital Gains (LTCG) and are taxed at 12.5%. For holdings of less than 24 months, gains are considered Short-Term Capital Gains (STCG) and taxed according to your income tax slab.  

Which is better for long-term wealth building?

If you plan to keep gold for personal use, like future milestones such as weddings, or to pass it down to your heirs, physical gold like jewellery, coins, or bars can be a good choice. In many Indian families, passing on physical gold to children is a common tradition. This can be a good long-term asset as its value will potentially increase over time.

Gold ETFs can also be suitable for building long-term wealth. The underlying value of gold increases at the same rate whether you hold physical gold or ETFs, but with physical gold, additional costs such as making charges, storage, and potential resale deductions can reduce your returns. Virtual gold, like ETFs and even gold mutual funds, may be able to provide better net returns due to lower costs and easier liquidity.  

Conclusion: Is it better to buy physical gold or an ETF?

You can choose either option, or even both. You can invest in physical gold for personal use and jewellery, and gold ETFs for long-term wealth building. The most important thing is to understand the requirement of an individual, features, costs, and benefits of each option before making your decision.

 

 

 An investor education initiative by Edelweiss Mutual Fund

 

All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms

 

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY

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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.