Why Gold ETFs are a Better Investment Option Compared to Physical Gold?

Imagine a scenario where you could invest in gold without the hassle of storing it securely. This is the reality with Gold Exchange Traded Funds (ETFs). It is a modern investment avenue that has gained popularity in India since the first Gold ETF was introduced in 2007.

India’s investment options have grown a lot, giving investors many choices. Gold ETFs, holding gold of at least 99.5% purity as per the London Bullion Market Association (LBMA) standards, present a unique opportunity in this evolving market.

These funds provide an efficient and secure way to invest in gold, aligning with the contemporary needs of investors who seek both the stability of gold and the flexibility of modern financial instruments.

How Do Gold ETFs Work?

Gold ETFs present an innovative way to invest in gold. Essentially, they allow you to own gold in a digital form, which is backed by physical gold of high purity. Every unit of a Gold Exchange-Traded Fund (ETF) represents 1 gram of gold that is assured to be of 99.5% purity, akin to that of high-purity gold bars.

The prices of these Gold ETFs are updated regularly and can be accessed on the official websites of the Bombay Stock Exchange and the National Stock Exchange. This ensures transparent and convenient trading.

Buying and Selling

Investing in Gold ETFs is straightforward. These can be purchased on the BSE or NSE through a stockbroker, using a share market app.

Unlike physical gold, where prices vary across regions, Gold ETFs maintain uniform pricing across India. This uniformity ensures that you can buy or sell your ETF units at consistent prices nationwide.

Pricing and Fees

In India, Gold ETFs in 2023 come with brokerage fees around 0.5% to 1% and varying expense ratios, like IDBI Gold ETF at 0.35% and UTI Gold ETF at 1.06%.

Investors should assess these costs alongside fund performance and size, as they influence the profitability of Gold ETF investments. Regular portfolio reviews are advised for optimised returns​.

Market Presence

Gold ETFs function by mirroring the price of gold, enabling investors to trade gold like they would trade stocks. A prominent example is the SBI Gold ETF, which allows investors to gain exposure to the market price of gold.

This method is more secure and convenient than owning physical gold because it eliminates the risks of storage and the cost associated with the GST on purchases.

Gold ETFs are also exempt from GST and can be pledged for loans, offering a modern, fluid, and tax-smart way to invest in the precious metal. They are transacted through a Demat account for easy buying and selling.

Gold ETFs vs Physical Gold – Detailed Comparison

Traditionally, investors looking to invest in gold have opted for tangible assets like jewellery, coins and ingots. The emergence of Gold ETFs has revolutionised gold investment practices.

By examining the characteristics of Gold ETFs in comparison to those of tangible gold, one can discern why an increasing number of investors are opting for Gold ETFs.

Investment Type Gold ETFs Physical Gold
Investment Limits No minimum & maximum limit No minimum & maximum limit for physical gold; but digital gold has no regulator, offering a higher risk
Safety and Insurance Safe and insured Physical gold carries the risk of theft or loss
Taxation No tax on holding; capital gains tax upon selling Buying physical gold often involves a 3% GST, and selling it can incur capital gains tax
Loan Collateral Loans possible from formal lenders Loan options vary, with possibilities for both formal and informal lending
Liquidity Instant liquidity on stock exchanges Highly liquid but can vary based on the form and location
Purity Purity assured to LBMA standards Purity can be uncertain, especially in jewellery
Costs and Pricing Transparent pricing with minimal costs Incurs making charges and GST; price spread can be significant

What Should Investors Know Before Investing

Like any investment, Gold ETFs come with their own set of market risks.

  • The value of these funds can swing with shifts in economic conditions, currency valuations, and global political climates.
  • It’s also important for investors to consider the counterparty risk, which arises if the Gold ETF provider runs into financial troubles, potentially affecting the investment’s worth.
  • Investors must scrutinise the associated costs, such as management and brokerage fees, which can reduce the overall profits from the investment.

Notably, in 2023, despite the global holdings of gold ETFs decreasing by 7%, the aggregate assets under management increased by 5%, buoyed by the higher gold price.

Final Thoughts

“Gold is money, everything else is credit,” once observed J.P. Morgan. As we steer through the investment landscape, platforms like Appreciate Wealth serve as navigators for individuals starting their investment journey.

They offer tools and resources that help investors understand market dynamics and make informed decisions. With the right guidance and a strategic approach, gold ETFs can be a valuable addition to one’s investment portfolio, providing the dual benefits of security and growth.

Author: Yogesh Kansal (Co-Founder @ Appreciate)

yogesh kansal founder of appreciate

Author Bio
Yogesh is a Co-Founder at Appreciate, a fintech platform helping Indians achieve their financial goals through globally diversified one-click investing.


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