Difference between physical gold and gold ETFs

Updated At: July 21st 2023

Factors that differentiate Gold ETF from physical gold

Buying gold is a cultural phenomenon in India. So much so that it burns a hole in India’s current account when Indians go on a buying spree for physical gold. In many parts of India, people buy gold for celebrations and during festivals.

But investing in gold is not merely limited to buying physical gold anymore. One can invest in the precious metal through gold ETF, sovereign gold bonds, (SGBs) and digital gold have revolutionised how people invest in this precious metal.

What is a Gold ETF?

Gold exchange traded funds or ETFs are a type of fund that are tradable on an exchange and invest in physical gold. These are passively managed funds that have gold as their underlying asset.

Every unit of a gold ETF is backed by 1 gram of gold with 99.5% purity and is listed on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Investors can trade in these ETFs just like any other security. This mode of gold investment lets you invest in gold without actually owning it in its physical form.

Benefits of investing in Gold ETF

Assurance of quality: Gold ETFs are backed by gold of the highest purity. An investor who invests in it would never have to worry about the quality of the underlying asset.
Real-time prices: Gold ETFs track the real-time price of gold. Hence, any change in the price will reflect on the daily net asset value or price of each ETF unit. This creates transparency for investors as they will know the value of their investment. choose the best gold ETF in India.
Safety: The ETF invests in physical gold that is stored safely with custodians. There is no risk of theft as the investor is not holding the physical gold in their person.
Diversification: This mode of gold investment allows you to diversify your portfolio if you have already invested in equity and debt

Benefits of investing in physical gold
Here are a few advantages of choosing physical gold over gold ETFs.

Emotional aspect: The primary reason why people have been investing in gold is because of the emotional value attached to it. Nothing beats the emotional satisfaction of touching or seeing your gold asset.
Jewellery making: You can’t make jewellery from the gold investments in your demat account. No matter which mode of gold you invest in, if you ever decide to make jewellery out of it, you will need physical gold for it.
Gold loans: Lenders offer loans against physical gold at very nominal rates. It helps you meet your financial needs without selling your gold asset.

Difference between gold ETF and physical gold

Factors	Physical Gold	Gold ETF
Form	You get physical gold in the form of gold bars, coins, and jewellery.	You only gain possession of actual gold if you redeem the units.
Purity	Physical gold needs to be hallmarked as a proof of its purity.	The units are backed by gold of the highest purity.
Transparency	As making charges are involved , the correct price of gold is not always reflected correctly.	Demat charges and total expense ratio of ETFs are publicly disclosed.
Mode of purchase	Besides jewellery shops, you can buy gold bars or coins from banks and post offices.	You need a demat and trading account to invest in gold ETFs.
Liquidity	You can sell physical gold in a jewellery store for money.	ETFs are freely tradable on stock exchanges thereby giving them high liquidity.
Tax implications	Long term capital gains are taxed at 20% and short term capital gains (STCG) at slab rates.	All gains are taxed a STCG at individual’s applicable slab rate.

Takeaway

There is no winner if we start comparing gold ETF vs physical gold. It entirely depends on what method of investment you find suitable. Both assets come with their pros and cons. Gold ETF is a modern investment option that assures of purity, whereas the emotional value attached of investing in physical gold is irreplaceable. If you are confused about what to pick, you should consult your financial advisor before taking an investment decision.

Disclaimer - This article is for information purposes only and should not be considered investment advice. Please consult your financial advisor and/or carry out your own research on any of your planned investments.