Gold is one of the most preferred investments in India for years. People tend to buy gold on auspicious occasions and festivals having cultural and traditional significance. Gold also holds a great value protection against inflation and economic uncertainty. With passing of the times, the forms of investment in Gold have been changed. Gold investment now may be done in many forms like buying jewellery, coins, bars, gold exchange-traded funds, gold funds, sovereign gold bond scheme, Digi-Gold etc.
Investment in gold instruments other than owning as physical form is gradually picking up with young generation favouring non-physical investment in demat form. The common question always comes over investment choice between physical gold and gold ETF. An auspicious Diwali – “Dhanteras” is nearing, and we have tried to simplify the same for the investors to make well informed Diwali investment choice.
Gold Exchange Traded Funds are units representing physical gold which may be in paper or dematerialised form and are an alternative to physical gold. Gold ETFs are mutual funds that invest in gold bullion and track gold’s domestic prices. They are backed by gold with a purity of 99.5%. As per revised rules, gains from investments in gold funds will be taxed at the respective slab irrespective of the holding period.
Benefits of Gold Exchange traded Funds:
Minium Investment: The minimum investment amount for gold ETF is one unit of one gram where investors have option to buy in multiple of the units. For example, if price of gold is Rs. 70000 per 10-gram, one unit of gold ETF may come with a mere approx. price of Rs. 70 on the exchange (as per the unit basket size of the ETF).
Hassle free smooth transaction: Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments. Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. Gold ETFs trade on the cash segment of BSE & NSE, like any other company stock, and may be bought and sold continuously at market prices.
Liquidity: Gold ETFs are more liquid than physical gold, which allows investors to buy and sell units on exchange like ordinary shares on the respective exchanges without logistical and operational challenges compared to physical gold.
Purity and Transparency: Gold held in physical form against units offered comes with a purityof 995 and above of LBMA (London Bullion Market Association) approved brands as per the SEBI norms. The price discovery of Gold ETF is very transparent allowing investors to monitor and gauge the price performance easily.
Safety: Gold ETFs units come into demat form, which is safe from theft, storage cost, fraud or making
charges.
Less Expensive: There is no entry load and exit load for Gold ETFs. The only expenses include brokerage and fund management fees.
Investors in India are emotionally attached to the physical gold ownership in the form of jewellery, coins and bars. Gold having social value and cultural value in India, the major purchase of physical gold comes from the households. One may buy jewellery directly from the jewellers hence there is no counterparty risk. However, unlike Gold ETFs, investment into physical gold bears higher minimum investment, making charges and storage costs.
Benefits of owning/investing in Jewellery:
Physical Possession: Investors get the gold in physical form which makes it secure investment having direct ownership providing sense of security during uncertain times.
Easy Liquidity: India’s gold physical market is very liquid where one may purchase and sell gold at any time without any issue of liquidity while spot market premium/discount differs domestically on regional levels.
Emergency Use: Gold in physical form protects against financial adversity or any other emergency.
Though the returns on investment for Gold ETFs and physical gold are almost in line, both have their own pros and cons. Hence it is important for investors to weigh their gold investments requirement carefully before choosing one form of gold as an investment.
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