Gold ETF: Which is a better investment bet, gold or gold ETFs?

Gold is the most popular metal in India as it considered auspicious and used in various religious ceremonies in India. For centuries, gold has been seen as an investment tool and also purchased for financial safety. India is one of the top countries in the world when it comes to demand for gold. India stands only second to China today in spending of Gold, but it won’t be surprising that India dethrones China in the future to become number one consumer of Gold. In today’s day and age, investing in gold is not limited to buying physical gold ornaments or gold biscuits. You can invest in gold digitally through gold ETF. This article will help you to decide which is a better investment bet, physical gold or gold ETF.

Gold Exchange Trade Fund or Gold ETF

Gold Exchange Trade Fund is a mutual fund scheme that is open-ended and changes as per the fluctuating cost of gold in India. There are no making charges involved in Gold ETF and the income it generates for you, can be monitored on daily basis. Gold ETF can help beat inflation in the long-term and is a much safer bet than equities which are more volatile in the market. A value of one unit of Gold ETF is equal to 1 gram of gold. Gold ETF provides the investor dual benefit of investing in the financial market as per investment in gold. The return on gold ETF is made when the gold prices rise and due to the digital nature of investment, there is no disadvantage with regards to the purity of gold. It remains uniform and is a more transparent financial product throughout the country.

How Gold ETFs work

Buying Gold ETF is like buying actual gold, but in the digital sense. For example – when you buy Gold ETF, the entity that is selling Gold ETF actually buys the gold at the back-end. They also give guarantee about the purity of the gold.  Gold Benchmark Exchange Traded Scheme (Gold BeES) is registered with NSE (National Stock Exchange).  These schemes carefully follow the market trend, the cost of gold trade in India. NSE assigns an authorised body to see over the sale and purchase of gold to create ETFs. The authorising body comprises of notably large companies. Due to the compliance and procedure in place, cost of physical gold and Gold ETF remains identical for the benefit and transparency of the investors.

When to purchase gold in physical form

Industry experts say that it is better to invest in gold mutual funds in India funds scheme unless the gold is needed in physical form for personal use or in an event like marriage. There are many benefits of investment in demat form and the most evident is no chance of theft.  Investment in Gold ETF can be started for as low as INR 1000 a month.

Why to avoid physical gold

Gold ETF give better returns as compared to physical gold purchased, as it does not involve making charges of the jeweller. The funds are also highly liquid and can be redeemed anytime. Physical gold carries many additional expenses on the actual investment which make it difficult to get good returns and defeats the purpose of investment.

As we know now that investment can be done in two different ways, one is a physical purchase of gold and the other is through Gold Exchange Trade Fund. Let’s discuss the details of the difference between the two in the below table:

	Gold (physical gold)	Gold ETFs
Meaning	The investor buys the gold in physical form from a retail store. The purity of gold may not adhere to the standard purity requirement of 99.5%	An open-ended exchange traded funds, Gold ETF invests the money in certified gold bullion (gold purity of 99.5%).  The value of the units allotted to the investor depends on physical gold traded in the market.
Pricing	The cost of physical gold is not standard and it depends from jeweller to jeweller.	Gold ETFs cost is as per international standards and are standard throughout the country.
Affordability	Gold biscuits come in the standard denomination of 10 grams which require a big investment	Gold ETF are much more affordable as the units value start from 1 gram.
Additional charges on investment	When investing in physical gold through ornaments, an investor has to pay 20% to 30% in making charges of the total value of the asset. There are further government taxes levied during billing of the product.	They are comparatively less expense in purchasing Gold ETF. The expense ratio is only 1% every year of the total asset value and brokerage fees is around 0.5% per transaction.
Wealth tax	Investor will have to pay wealth tax of 1% if the cost of the gold possessed by the investor exceeds INR 30 lakhs	There is no wealth tax payable by the investor on Gold ETFs.
Short-term capital gain tax	If the gold is sold by the investors before completion of 3 years, then short term capital gain tax will be applicable as per the prevailing Income Tax rules and regulations.	Short term capital gain clause is the same even for the Gold ETF
Long-term capital gain tax	If the gold is sold by the investor after the completion of 3 years, then long term capital gain will be applicable as per the prevailing Income tax rules and regulations.	The long-term capital gain tax clause is same for Gold ETF as for physical gold.
Liquidity	Physical gold can be purchased through banks and jewellers. It can although only be sold through jewellers. The buying is predominately done offline by going to the jewellery shops.	Gold ETF can be purchased online from a website and the whole process of buying has become simpler with an online platform. It can also be sold easily as it is traded on NSE and BSE. The whole process is regulated and hence, chances of fraud are also less.
Returns calculation	The actual returns are calculated by the current market price of gold minus the purchase price which includes the making charges and tax.	The actual returns are calculated by the current market price of unit of gold ETF minus buying price and commission paid.
Demat account requirement	There is no need for demat account to purchase physical gold	To purchase gold ETF, an investor first needs to open a demat account

Conclusion

If you are purchasing gold for investment, then Gold ETF is the way forward. There is no risk of impurity or thefts as the investment of Gold ETF is in your demat account. The returns on the Gold ETF are also more as there are no hefty making charges involved. Gold ETF also has more transparency and are safe to invest as they are robustly regulated than physical gold transactions. Hence, gold ETF makes for a better bet in today’s world of internet and digitalisation.