Q. I am a 30-year-old working professional with a private job in IT services. Given the uncertainty of the stock markets and increasing inflation, I am looking forward to investing in gold instruments to hedge inflation and diversify my investment portfolio. I have heard gold ETF is a better investment option than physical gold. Could you elaborate on the benefits gold ETF entails as compared to physical gold?
Praveen Kumar Patna, Bihar
A gold ETF is an exchange-traded fund (ETF) that attempts to replicate the price of physical gold. They are passive investment products that invest in gold bullion based on gold prices. Gold ETFs are, in a nutshell, units representing physical gold that may exist in paper or digital form. One gold ETF unit is equivalent to 1 gm of gold and is backed by highly pure physical gold.
Interestingly, gold ETFs combine the versatility of stock with the ease of investing in physical gold. Gold exchange-traded funds (ETFs) are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE), much like any other company's stock. Gold ETFs trade in the cash segment of the BSE and NSE, just like any other company stock, and can be continuously purchased and sold at market rates.
Gold ETF vs Physical Gold
The answer to the question of which is a better choice between gold ETFs and physical gold is a subjective one. Ideally, you should only purchase gold in physical form for immediate personal consumption and use. But if you are purchasing gold solely for financial purposes you should consider purchasing gold ETFs.
Some benefits of gold ETF over physical gold have been listed below:
Hassle-free purchase of gold
When it comes to physical gold, you must examine its purity certifications and be physically involved in the entire arduous purchasing procedure. Buying gold through an ETF is as straightforward as purchasing any other mutual fund. Even one unit (equal to 1 gm of gold) can be purchased. On the other hand, even the smallest piece of jewelry weighs at least 4 grams.
Gold ETF is more liquid than physical gold
When you purchase gold in physical form, a premium is added to the market price that is not taken into account when the gold is resold. In addition, jewelers buy back gold at a price that is approximately 2 to 3 percent below the market cost. The sole extra cost you must consider when purchasing gold ETFs is the fund management fee, also known as the expense ratio which is deducted from your invested amount on a yearly basis, it is typically less than 0.1%.
On the taxation front, physical gold is subject to GST, whereas gold ETFs are not.
Safety and Storage
Another downside of holding tangible assets is issues associated with physical storage. You must find a location to store their gold such as bank lockers, which frequently come at a price. There is always a risk of theft while transporting or storing gold in its physical form.
For gold ETF, however, this is handled by the fund manager. In terms of purity, gold ETFs are backed by gold with a purity of 99.5%, assuring you of the gold’s quality. In contrast to actual gold, if you hold gold ETFs in your demat account, you do not have to worry about the safety of your investment.
Physical gold is typically priced inconsistently and may vary from region to region, whereas the gold ETF is available at a uniform price.
As gold ETFs are listed on NSE and BSE, they can be sold quickly by any device with internet access like any other listed stock in the market. Similar to other listed mutual funds or stocks, the sale proceeds are automatically deposited into your account. In contrast, the process of selling physical gold is more complex and cumbersome.
How to invest in gold ETF?
To invest in a gold ETF fund, you need to open a trading and demat account. You can easily open an account by providing identification, address proof, and your PAN card information.
You can purchase and sell gold ETFs in the same manner as stocks. When you redeem a gold ETF, you receive the cash equivalent rather than actual gold. Trading of gold ETFs occurs via a dematerialized account (Demat) and a broker, making it a very easy option to invest electronically in gold. The holdings of a gold ETF are completely transparent due to its direct gold pricing.
Gold is one of the world's most valuable commodities and investment options. It has served as a benchmark against currencies for centuries. In recent years, demand for gold has only soared. Even in the present day, all sorts of investment products that are investing in gold are gaining wide acceptance.
However, if you are a young working professional looking to invest in gold, gold ETFs are the most optimal gold investment option available at your disposal given their liquidity, tax efficiency, hassle-free storage, etc.
Therefore, investment in gold ETFs is the optimal hedge against inflation. Both gold ETFs and physical gold have their benefits and drawbacks. Ultimately one should identify his/her investment goals and risk profile before making any investment decision.
Kuvera is a free direct mutual fund investing platform.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.