Gold ETF vs Physical Gold.What is better for You?


In my earlier article on “Should I invest in Gold?” I had discussed on whether you should invest in gold or not? How to Accumulate Gold for Marriages? and how equity has performed against gold in India? In this article I had also discussed that you should be clear with your objective of buying gold. I mean to say that whether you are buying gold for marriages or investment objective should be clear.

Now many investors also ask than how they should invest in gold. Whether they should buy physical gold or they should buy paper gold in the form of Gold ETF.

First of all let us understand What is Gold ETF? and How it works?

What is Gold ETF?

Full form of Gold ETF is Gold Exchange Traded Fund and as the name indicates Gold ETFs are open-ended mutual fund schemes that will 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 only but that is wrong. Mutual funds also invest in Gold and Bonds.

How it operates?

These funds are of open ended nature. So investors can any time buy and sell units of Gold ETF. When an investor invests in the units of Gold ETF, Gold of that same value is bought in the fund and stored with custodian. And when an investor sells his units, mutual fund sells those units and returns back investor’s money. In this process ETF’s will charge their management expenses which are normally in the range of .75% to 1.25%. These funds are passively managed so there is no active role of fund managers and they closely track returns of the Gold. The difference in returns of physical gold and gold ETF would be only expense ratio charged by them.

Now let us check in table below advantages of Gold ETF over Physical Gold.

Physical Gold vs Gold ETF :

Following table gives a clear comparison between physical Gold and Gold ETF.


As it is visible in table above, following are advantages of Gold ETF over Physical Gold 

Making Charges:If you are buying physical gold in the form of ornaments and jewelry than you have to pay 10 to 20% additional by way of making charges. If you are buying gold for investment purpose or accumulating for marriage of your children, I would never suggest you to buy in the form of ornaments or jewelry 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, 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 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 fund.

Demat Account : Gold ETF units are stored in your 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 ETF. Whereas in physical form of Gold demat account is not required.

Tax Implications: As you can see in table above sale of physical gold qualifies for long term capital gain only after 3 years whereas sale of Gold ETF qualifies for long term capital gain after one year. So this helps to minimize your tax liability.

 For Wealth tax purpose, Physical Gold attracts wealth tax where as Gold ETF is exempt from Wealth Tax.

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 Demat account. But with introduction of fund of funds that invest in Gold ETF, this problem is also resolved. Now you don’t need to have 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 ETF?

 FOFs investing in Gold ETF are again open ended mutual funds which are investing in Gold ETF only. Investors who don’t have demat account can’t invest in Gold ETF so to resolve this problem some mutual fund houses have launched separate funds which invest in Gold ETFs. So investors are not required to open demat account to invest in Gold ETF. This also helps investors to invest in Gold through SIP mode.

To conclude with, unless you want to buy gold for your personal consumption, I would always suggest you to go for Gold ETF. It offers many benefits over Physical Gold. Even when you are accumulating Gold for marriage you can buy through Gold ETF and sell at the times when actual marriage comes and you want to make ornaments.