Investing in Gold? 5 Differences In Buying Physical Gold Vs ETFs

gold ETF

Gold holds an inevitable place in India’s values and traditions and gold has always generated significant returns over the years.

Nowadays there is not just one form of gold available in the market. Apart from buying gold jewellery, gold can also be bought as a gold fund.

Gold ETFs

Gold ETFs (Gold Exchange Traded Funds) are open-ended mutual fund schemes that invest the money collected from investors in standard gold bullion. The investor’s holding is denoted in units, which will be listed on a stock exchange.

Investors can anytime buy and sell units of Gold ETF. In this process, ETF’s charges management expenses which are normally in the range of .75% to 1.25%.

Gold ETF vs Physical Gold

This question can answer whether you should buy physical gold or gold funds. You should buy gold physically only when you are buying it for immediate personal consumption and use. But if it is purely for investment purpose or accumulating for the marriage of your children, you should consider buying gold ETFs ( as because of the time lag the design goes out of fashion for which you ended up paying 20-30% making charges).

Here are a number of reasons that prove that the hype about gold funds being better than managing physical gold is justified-

Buying gold is not a hassle-free process

You have to check its hallmark certificates for purity and be physically involved in the whole buying process which is long and tiring. Whereas buying gold via an ETF is as simple as buying any other mutual fund. You can even buy as little as 1 unit (equivalent to 1 gram of gold) whereas even the smallest piece of jewellery weighs at least 4 grams.

Holding Gold ETFs is more liquid and economical

When you buy gold, be it in any form, a making charge is charged above the market price of gold which is not considered when it is sold back. In addition, jewellers buy back gold at a price about 2-3% lower than the market rate. The only cost investors have to consider when buying gold ETFs is the fund management fee, which is an average of 1% only.

Tax

On the taxation front, physical gold attracts wealth tax and VAT, neither of which apply to ETFs.

Storage

Another drawback to physical investing is its physical storage. Buyers need to find a place to store their gold and that often has high costs associated with it. For Physical Gold, there is always risk of theft at the time of transit or when it is stored. But for Gold ETF, it is taken care of by fund.

Gold ETFs are backed by gold of 99.5% purity, so investors can be assured about the quality of gold. Investors hold the gold ETFs in a demat account, and don’t need to bother about its security as in the case of physical gold. Pricing of physical gold is not uniform normally whereas, Gold ETF follows international prices.

Gold ETF can be sold instantly with anything that has internet connection. Like other mutual funds, the money is automatically credited to your account, when the sale is realized. Whereas selling physical gold is a more complex process.

Buying paper Gold without demat account

The only counter-argument to these benefits is that Gold ETF units are stored in demat account so for buying Gold ETF,  demat account is required but even if you don’t have demat account, you can invest in funds which are investing in Gold ETFs. Here are some mutual funds that one can buy without demat account:

  1. Reliance Gold Savings Fund
  2. HDFC Gold Fund
  3. SBI Gold Fund
  4. DSP BlackRock World Gold Fund
  5. Kotal Gold Fund