For generations, gold has been a trusted store of value for Indian investors. But with financial markets becoming more sophisticated, gold is no longer just about ornaments or coins—it's also an investment asset.
And when it comes to investing, one common confusion remains: should you hold gold in physical form or through Gold ETFs?
Before answering that, let's first understand what a Gold ETF is and how it operates.
What is Gold ETF?
The full form of Gold ETF is Gold Exchange Traded Fund, and as the name indicates, Gold ETFs are open-ended mutual fund schemes that invest the money collected from investors in standard gold bullion (0.995 purity). The investor's holding will be denoted in units, which will be listed on a stock exchange. Normally, we have a common understanding that mutual funds invest only in Equity shares, but that is wrong. Mutual funds also invest in Gold and Bonds.
How does it operate?
These funds are of an open-ended nature. So investors can buy and sell units of the Gold ETF at any time. When an investor invests in the units of a Gold ETF, Gold of that same value is bought in the fund and stored with a custodian. And when an investor sells his units, the mutual fund sells those units and returns the investor's money. In this process, ETFs will charge their management expenses, which are normally in the range of 0.50% to 0.85%. These funds are passively managed, so there is no active role for fund managers, and they closely track the returns of the Gold. The difference in returns of physical gold and gold ETF would be only the expense ratio charged by them.
Where Should You Invest — In Physical Gold or Gold ETF?
It's a common dilemma for many investors—should you go for physical gold or choose the smarter Gold ETF route?
Before making that decision, let's take a quick look at the pros and cons of both options to understand which one suits your financial goals better.
| Feature | Physical Gold | Gold ETF |
| Making charges | Making charges in the range of 10% to 20% if buying in the form of ornaments + GST. | No making charges. |
| Purity of Gold | Purity of Gold is always in question. | Gold ETF only deals with 99.5% purity Gold. |
| Risk during Transition | Risk is involved during transition and even when it is stored at home. | Risk during transition and storage is taken care of by Funds. |
| Demat Account | Demat Account is not required. | Demat Account is required. |
| Short-Term Capital Gain | Considered as short-term capital gain if holding period is less than 24 months. Taxed as per tax bracket. | Considered as short-term capital gain if holding period is less than 12 months. Taxed as per tax bracket. |
| Long-Term Capital Gain | Considered as Long-Term Capital gain if holding period is 24 months or more. Taxed at 12.5% without indexation. | Considered as Long-Term Capital gain if holding period is 12 months or more. Taxed at 12.5% without indexation. |
| Pricing | Pricing is never uniform. | Pricing is at international standards and always transparent. |
| GST | A 3% GST is levied on the value of the gold. Additionally, 5% GST is charged on making charges for jewelry. | No GST is applicable on the purchase of Gold ETFs, though you pay an annual expense ratio to the fund house. |
As is visible in the table above, the following are advantages of Gold ETF over Physical Gold:
Making Charges: If you are buying physical gold in the form of ornaments and jewellery, you have to pay 10% to 20% additional by way of making charges. If you are buying gold for investment purposes or accumulating for the marriage of your children, I would never suggest you to buy it in the form of ornaments or jewellery because there you have to pay making charges of around 10% to 20%. You should buy ornaments only when you are buying it for personal consumption and use.
Purity of Gold: When you are buying physical gold, the purity of gold is always in question, and this has an impact at the time when you sell it. So if the purity level of gold is low, the buyer will pay less for the same.
Risk during Transition: For Physical Gold, there is always a risk of theft at the time of moving it from one place to another or at the times it is stored. But for Gold ETF, it is taken care of by the fund.
Demat Account: Gold ETF units are stored in your demat account, so for buying Gold ETF, a demat account is required. However, even if you don't have a demat account, you can invest in funds which are investing in Gold ETF. Whereas in physical form of Gold, a demat account is not required.
Tax Implications: As you can see in the table above, the sale of physical gold qualifies for long-term capital gain only after 24 months, whereas the sale of Gold ETF qualifies for long-term capital gain after 12 months. So this helps to minimize your tax liability.
Pricing: Pricing of physical gold is not uniform normally. Whereas, Gold ETF follows international prices.
All the above points prove that buying Gold ETF is better than Physical Gold. The only problem with Gold ETF is you need to have a Demat account. But with the introduction of fund of funds that invest in Gold ETF, this problem is also resolved. Now you don't need to have a Demat account for investing in Gold ETF. Let us understand how these fund of funds invest in Gold ETF.
What are FOFs investing in Gold ETFs?
FOFs investing in Gold ETFs are open-ended mutual funds that invest exclusively in Gold Exchange Traded Funds. They are designed especially for investors who wish to invest in gold but do not have a demat account.
Since Gold ETFs can only be bought and sold through a demat account, some mutual fund houses introduced Gold Fund of Funds (Gold FOFs) — allowing investors to invest in Gold ETFs without the need for a demat account. This structure also enables investors to invest through SIP mode, making it convenient to accumulate gold gradually over time.
Gold FOFs usually have an expense ratio ranging from 1% to 1.15%, which covers fund management and operational costs.
From a taxation point of view:
If Gold FOF units are sold after 24 months from the date of investment, the gains are taxed at a flat rate of 12.5%.
If they are sold within 24 months, the entire gain is added to the investor's income and taxed as per their income tax slab rate.
Conclusion
To conclude, unless your goal is to buy gold for personal consumption, Gold ETFs (or FOFs investing in them) are a much better alternative. They are safer, more cost-efficient, and easier to manage than physical gold. Even if you're accumulating gold for a future event like a marriage, you can systematically invest in Gold ETFs (or Gold FOFs) and redeem them when the time comes to make ornaments.
