Gold Vs Gold ETFs

So gold rises….. years later it seems to be again on the move!!

That is exactly how the story of gold goes.They usually say ‘ old is gold’ to things that are invaluable but when one looks in deeply then in literal sense,the more old the gold is  the more closer it is to being priceless. Traditionally stored in the form of jewellery, coins and behold, even bars, gold seems to always have gained momentum over a period of time. When it rises in value, we usually think “wish we had bought gold yesterday” or “thank god we bought it yesterday!” Needless to mention gold is definitely on the move. People have bought gold even when it was rocking high and sold it even when it was rocking low. This entire cycle depends a lot on our financial needs but rarely has there been a case where people have incurred huge losses on the sale of gold. Investment in gold can be both short term as well as long term. The more you remain invested the larger profits you yield.21gold2

So the mutual fund people got smart and decided to introduce a mutual fund that moved alongwith the prices of gold on the stock exchanges. A fund was needed because all said and done, we are aware that rarely have people got lucky in getting the exact market value on sale of gold. Safety of keeping gold, locker hassles and charges were a few other drawbacks in keeping gold in the form of jewellery.

Hence, introduction of Gold Exchange traded funds (Gold ETFs) were a boon but only to people who knew exactly what they were and how they worked. Gold exchange-traded products are traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New York. Each unit of Gold ETF represents one gram of gold with 99.5% purity.

So, “why buy gold ETF and not gold jewellery?” is the first question that comes to anyone’s mind. The answer is because you can invest small portion of your savings over a period of time depending on your budget. Secondly, there is no risk of it being stolen. People do chose to keep jewellery in lockers but locker charges are another expense. Incase of Gold ETFs the worry of theft etc. is avoided as Gold ETFs can be held in the demat form as well as paper form.

One very important point to note is that when we sell gold jewellery, we often do not get the cash in return but it has to be exchanged for another set of jewellery and in such a case, it becomes illiquid. Such is not the case with Gold ETF because it can be surrendered anytime provided it is an open- ended fund. Usually, selling gold jewellery to jewellers gets us a lesser price than quoted. The reason being that there are making or labor charges that are deducted from the jewellery and these can be huge.

As far as taxation goes, there are no sales tax, VAT or securities transaction tax on gold ETFs. They are eligible for the long-term capital gains after one year, unlike physical gold, which is eligible for long-term capital gains after three years.

One has to remember that Gold ETFs have a certain fee which is charged in most cases. This hovers around 1%. However, the advantages outweigh the disadvantages and a gold ETF hence, becomes a must in a portfoilo in an investor’s kitty.Just one quick point to remember is that while choosing a gold ETF fund one should carefully pick an ETF that is open ended with a good past performance and has a low exit charge,if any.

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