Which is a better investment bet, gold or gold ETFs? Find out

By Aasif Hirani

Indians love gold. It would be difficult to find a person who has never invested in gold.

They might have invested either in physical form, or now with time, in more evolved forms of investment like gold ETFs (exchange traded funds) or Sovereign Gold Bond Scheme.

Gold ETF is an option to invest in gold online. Before we venture into pros and cons of gold and gold ETF, let us first establish the objective of buying gold. Are we buying for personal consumption, buying for children’s marriage or for investment?

Now if we are buying for personal consumption then it makes sense to buy physical gold in form of jewellery.

Gold bars and coins are also another way of buying physical gold to gift someone or to make jewellery in near future. But if we are buying for investment or for child’s marriage then there is another option, which is gold EFT.

Gold ETFs have been rising in popularity due to their convenience. They are easy to trade, no need to store and no worries of theft.

Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion of 99.5 per cent purity. These funds are of open ended nature that trade on a stock exchange just like the shares of an individual company. So investors can any time buying and selling units of gold ETF.

When an investor invests in the units of gold ETF, gold of that same value is bought in the fund and stored with the custodian.

Now investors need to keep in mind that they don’t own gold and they will not get delivery of physical gold. Investors should keep in mind to select gold ETFs, which provide least management expense. Usually funds charges between 0.62 per cent and 1.20 per cent per annum. The difference in returns of physical gold and gold ETF would be expense ratio charged by them.

The tax structure under GST has not been decided yet, but if implemented, it is expected that the buyer of gold jewellery will end up paying more. So after GST, gold prices are expected to increase domestically.

It is imperative to note that the market price of gold ETFs tracks the domestic price of gold. So if gold prices are declining, gold ETFs will also decline. It is not an instrument to beat or outperform gold prices. With rise in stock market, the pessimism is highest in gold and we feel in short term there is definitely room for gold prices to move up.

If one is buying gold for investment purpose or accumulating for marriage of their children, we would not suggest buying in the form of ornaments or jewelry because then investors have to pay making charges of around 10 per cent to 20 per cent. Additionally there is cost and risk of storing.

Instead by choosing gold ETFs, accumulation of gold for long term is easy. It is safest way and there is no question of purity.

(Aasif Hirani is the Director of Tradebulls Group. He has 12 years of experience in the finance industry. Views expressed in this article are author's own and do not represent those of ETMarkets.com. Readers are advised to consult their financial advisers before taking any position based on these observations)