Difference between Physical Gold & Gold ETF

Physical gold needs no special introduction to us Indians. This shiny precious metal has been the part of Indian customs and traditions over many years now. It is almost a part of our Indian culture now. If you buy gold in bulk, it is referred to as a bullion. This bullion is used for producing gold bricks and gold coins. Apart from having customary values to it, gold is also considered as an asset. Because of its highly liquid nature, people own gold in physical form like coins, biscuits or bars. But due to advent in technology and thanks to new ways of investing, you can now buy gold in digital form as well. Gold exchange traded funds is a modern way of preserving the old tradition of investing in gold. But it is far more cost effective than investing in physical gold.

What are gold exchange traded funds? How are they different from gold in physical form?

A gold ETF (Exchange Traded Fund) is just like any other company stocks which can be bought and sold at the stock exchange. The investment objective of a gold ETF is to track the price of physical gold as its underlying index, with minimal tracking errors. Gold enthusiasts / investors can purchase Gold ETFs close to the actual price of the gold. Of its total assets, a gold ETF invests a minimum of 95 per cent in securities of a particular index (which is being replicated or tracked). If you are keen on investing in gold to save yourself from the vagaries of equity markets and are also looking for a way to beat inflation.

What is the difference between physical gold and gold ETFs?

Gold in physical form is available everywhere. If you want you can either buy coins, bars, gold biscuits or purchase gold jewellery. But there are some drawbacks that are linked to purchase of physical gold. The price of gold may vary depending on which vendor or region you buy it from. Preserving gold in large quantities at home is a risky job because it involves the fear of theft. If you decide to store gold in a safety vault in a bank then there are annual fees for renting such lockers. Then there is always the doubt of whether the gold you have bought is pure. With so many doubts and questions, owning gold in physical form for investment purposes doesn’t seem like a feasible option in today’s times at least.

A gold ETF on the other hand, is stored in digital or electronic form in an investor’s demat account. Gold exchange funds are highly liquid in nature. One can buy or sell gold ETFs on any working day. A gold ETF invests in gold bullions, companies dealing with gold commodities and are priced according to international gold standards. When you buy gold, the making charges add up to at least 20 to 30 percent. But when you buy a gold ETF, the expense ratio is generally 1%. That’s because ETFs are passively managed funds and hence, their expense ratio is on the lower side. Did you also know that there is a one percent wealth tax on the value of physical gold an individual purchases if the value of gold is above Rs. 30 lakhs? However, there is no such wealth tax applicable for buying gold ETFs.

Now that you know that difference between physical gold and gold ETFs which is going to be your choice of investment? Investing in gold ETFs has its own advantages, but investors are requested to determine their risk appetite before investing in these funds.

Mutual fund investments are subject to market risks, read all scheme related information carefully