What Are Gold ETFs and How Are They Better Than Physical Gold?
Gold ETFs are mutual funds that invest in physical gold and track its market price. Unlike physical gold, Gold ETFs are traded on stock exchanges like stocks, which means you can buy and sell them quickly. The most significant advantage of Gold ETFs is that they are cost-effective and transparent. With Gold ETFs, you don’t have to worry about handling physical gold, storage, or theft.
One of the key benefits of Gold ETFs is their liquidity. This means you can buy and sell them quickly, just like any other stock, at prices that reflect the current market value of gold. Unlike physical gold, where prices vary depending on the dealer, Gold ETFs have a uniform price. They also come with low expense ratios (around 0.5-1%) and minimal transaction fees. These funds offer good returns, with some, like ICICI Prudential Gold ETF, giving a return of about 21.58% in the last year.
Challenges with Physical Gold
While physical gold remains a popular choice in India, it comes with its own set of challenges. When you buy physical gold, you need to worry about authentication, insurance, storage, and theft risks. Additionally, buying gold jewellery involves high making charges (10-30%), which can reduce the value of your investment. Moreover, the resale value of physical gold is often lower than its purchase price due to price cuts.
In contrast, Gold ETFs offer security and convenience. Unlike physical gold, you don’t need to store them in a locker, and they can’t be stolen. Wealth tax is applicable on gold purchases exceeding ₹30 lakh, but it does not apply to investments in gold ETFs.
Which One Should You Choose?
Gold ETFs are ideal for investors who want a modern and hassle-free way to invest in gold. They are easy to trade, cost-effective, and offer good returns. On the other hand, physical gold may appeal to those who prefer owning gold in its tangible form for emotional or cultural reasons. However, it’s important to remember that physical gold comes with additional costs and risks.
Experts suggest investing a portion of your portfolio in gold ETFs (around 5-10%) to protect against market volatility and inflation. Gold has historically been a safe investment during uncertain times, and Gold ETFs provide a great way to tap into this asset class.
Gold ETFs vs. Physical Gold:
| Aspect | Gold ETFs | Physical Gold |
| Investment Mode | Traded on stock exchanges requires a demat account |
Purchased from banks or jewellery shops |
| Cost | Low expense ratios (0.5-1%), minimal transaction fees |
High making charges (10-30%), storage, and insurance costs |
| Liquidity | Highly liquid; can be bought and sold anytime on the exchange |
Difficult to sell and may not fetch the right price |
| Storage and Security | No storage is needed, and there is no risk of theft |
Requires safe storage, potential theft risk |
| Purity Risk | There is no risk, as the fund tracks the price of physical gold |
Risk of purity concerns, especially in gold jewellery |
| Returns | Reflects the market value of gold, typically consistent |
Dependent on the gold market but may involve lower resale value due to dealer cuts |
| Flexibility | There is no lock-in period; redeem anytime |
Limited flexibility, resale depends on demand |
| Risks | Low storage risk, but subject to market volatility |
High storage and purity risks, price fluctuations at resale |
Key Features of Gold ETFs:
- Gold ETFs are one of India’s most popular types.
- There is no lock-in period; you can redeem your investment at any time.
- Gold ETFs are taxed like debt funds (based on your income tax slab if invested after April 2023).
Short-Term Capital Gains (STCG) on Gold ETFs
Old Rule: Before Budget 2024, the holding period for STCG on gold ETFs was three years. Gains from units sold within three years were added to taxable income and taxed at the applicable slab rate.
New Rule: For ETFs purchased between April 1, 2023, and March 31, 2025, gains will be added to taxable income and taxed at slab rates, regardless of the holding period.
The holding period for STCG will be reduced from the next financial year. For ETFs purchased after March 31, 2025, and sold within 12 months, gains will also be taxed at the slab rate.
Long-Term Capital Gains (LTCG) on Gold ETFs
Old Rule: For gold ETFs bought before March 31, 2023, and held for over 3 years, a 20% tax with indexation applied.
For ETFs bought after April 1, 2023, gains were taxed as per the investor’s income tax slab.
New Rule: ETFs purchased between April 1, 2023, and March 31, 2025, will have gains added to taxable income and taxed at slab rates, no matter how long they are held.
For ETFs bought after March 31, 2025, and sold after 12 months, gains will be taxed at 12.5% without indexation benefits.
The holding period for LTCG qualification is now 12 months, reduced from 36 months.
These ETFs mainly invest in physical gold (90-100%) and a small portion in debt instruments to manage redemptions.
Some Gold ETFs are Axis Gold ETF, HDFC Gold ETF, SBI Gold ETF, Kotak Gold ETF
Conclusion: Gold ETFs offer a modern, liquid, and cost-effective way to invest in gold. They have fewer risks and fees than physical gold, making them ideal for investors seeking a more straightforward, hassle-free investment. Physical gold remains a good option for those who value owning a tangible asset, but it comes with higher costs and risks. (Details as on 1st Sep 2024)
