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Investing in Gold ETFs has gained popularity in the recent past in India but it is always a tricky thing for an Indian to decide whether to invest in real gold or gold ETFs.

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Advantages and Disadvantages of Investing in Gold ETFs

What is Gold ETF? – Exchange Traded Fund (ETF) is a kind of investment fund that is traded on stock exchanges. An index like a bond index or a stock index is tracked by most of the ETFs.
An ETF or a mutual fund that puts in money only in gold bullion and gold producing companies are called Gold ETFs. It is an open-ended mutual fund scheme and money collected from all investors is invested in gold. These funds are passively managed and they ensure good returns quite close to the returns from physical gold.
Investing in Gold ETF means you are heading towards investing in the index of gold ETF of a specific stock exchange. When you opt for a Gold ETF you are opting for a conglomerate of companies. Gold ETF comes with two options namely gold price ETF and gold stock ETF. The Gold stock ETF is linked to the companies operating in gold like gold mining etc whereas gold price ETF is associated to gold price index.
It is advisable that whenever you turn to gold ETFs make sure to know and understand the tax benefits attached to it and how it will help you.
Advantages of Investing in Gold ETF
  • It is advantageous to invest in gold ETFs as you do not undergo any making charges. Whenever you purchase gold coins, jewellery or bars you tend to pay some premiums as making charges whereas there is no such charge when it comes to gold ETFs.
  • You can breathe easy after investing in gold ETF as the returns are quite similar as compared to investing in physical gold and here you need not worry about your gold being stolen.
  • There are times when banks and jewelers refuse to buy back the gold coins and gold bars whereas you can easily sell off your gold ETF through broker at any point of time.
  • If we go by the trend, whenever dollar is weak gold tends to go up thus purchasing gold ETF when dollar is sliding can give a good support to your portfolio and vise versa.
  • While you invest in gold, you need to look for a locker or safe in a bank where you can keep the physical form of your investment and you end up paying locker fees annually for the purpose whereas there is nothing as such in buying a gold ETF.
  • While you plan to resale your physical gold, some amount is deducted by the jeweler or the bank during the resale but in case of gold ETF this does not happen.
  • Gold ETFs provide lot of liquidity. You can purchase and sale them very easily. They prove to be good investment option for short term and medium term investors.
  • There are chances that a jeweler may fool you but in the case of gold ETF, there is no scope of being cheated. These are pure and as they are virtual they are unlikely to be stolen.
  • In physical gold there is a lot of scope for price disparity. The price may vary from jeweler to jeweler, bank to bank. So if you feel you are not very good when it comes to bargaining then investing in gold ETF is the right choice for you.
  • In comparison to physical gold, gold ETFs are more tax efficient.
  • Gold ETFs are available in small denominations and that’s another benefit. When you think of investing in physical gold you cannot think of buying a gram or so. Your one gold ETF stands for one gram of gold.
  • Wealth tax comes into play when you hold more than a certain amount of physical gold. While in case of gold ETF there is no such tax applicable. 
Disadvantages of Investing in Gold ETFs
  • If you have made your mind that you need to have that beautiful gold piece that you saw last weekend while you were on a shopping spree then nothing can turn you in buying gold ETF.
  • When it comes to gold ETFs you can redeem them only in terms of cash and not gold as they are gold contracts and derivatives.
  • There are cases where capital gain tax breaks that are applicable to traditional exchange traded fund do not apply when it comes to gold ETF.
  • While you play in gold ETF you cannot ignore the demat account cost and annual maintenance that you have to pay.
  • Before you end up investing in gold ETF it is important for you to check the performance of the ETF.
  • While you invest in gold ETF you cannot ignore the market risks attached to them. 
There is no doubt that gold ETFs have gained a lot of popularity and have an edge over the physical gold but nothing can match the satisfaction and happiness that you get when you hold that yellow piece of metal.
If you feel that gold is just a matter of investment then you may try your hands with gold ETFs but if you are the one who adheres to the theme prevalent in India of gifting gold and also carrying it forth from generations to generations then nothing can beat its physical form.

  • anil:
    This is an excellent information.

    i am planning to go for GOLD ETF. One of my question is what is that market risk?
    Say i purchage 1 gm today with a cost of 2500, tommorow the gold value go do down to 2300, does it mean i loss 200 on my 1 gm. if so then after a yr if the gold price will be 3500 then i will be in 1000 of profit. In such situation i will go for a little longer duration to get the market benifit. Please correct me if my assumption is wrong.
    25-Apr-2013 05:50 PM
  • MD. Ayaz:
    investments on gold
    27-Dec-2012 09:45 PM